Factors affecting the Indian Rubber Industry

India is one of the largest producer and third largest consumer of natural rubber. India’s production of rubber is consistently growing at the rate of 6% per annum. Thanks to the India’s booming economy the rubber industry in the country has been growing significantly in strength and importance. India’s ever increasing demand for automobiles has been another reason for the growth of its rubber industry.

Rubber in India is grown in the following states:

Kanyakumari

Kerala

Karnataka

Goa

Andhra Pradesh

Orissa

NorthEastern states

Andaman and Nicobar Islands

Kerala is the largest rubber producing state in India accounting for 90% of India’s rubber output. 86% of the natural rubber growing areas are found in Kerala and Tamil Nadu.

Some salient points about the production and consumption of rubber in India are listed below:

It is the fifth largest consumer of natural rubber and synthetic rubber together in the world.

India is the world’s largest manufacturer of reclaim rubber.

Automotive tyre sector consumes over 50% of all kinds of rubber produced.

The bicycles tyres and tubes industry accounts for 15% of the consumption.

Footwear industry consumes around 12% of the rubber produced

Belts and hoses consume 6% of the rubber produced

Camelback and latex products account for around 7% of the rubber consumed

Other products: 10%

Indian Rubber Industry

India produces around 7 lakh tonnes of rubber annually worth around Rs.3000 crore. 70% of the rubber produced in India is of a form called as the Ribbed Smoked Sheets (RSS). RSS is also imported and accounts for 45% of the total rubber imports. The Indian rubber industry has a turnover of Rs.12000 crores and around 52% of the rubber is consumed by the automobile industry. Although, India is one of the leading producers of rubber, its production is not enough to meet the internal demands of the country and hence needs to import rubber from other countries. India’s annual import of rubber is around 50,000 tonnes.

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India has around 6000 manufacturing units of which 30 are large scale, 300 are medium scale and around 5600 falls in the small scale units. The various rubber products produced in India are natural rubber, carbon black, synthetic rubber, rubber chemicals which are used in industries such as engineering, aviation, aeronautics, pharmaceuticals, steel plants, railways, mines, textiles etc.

Factors affecting rubber price in India

Rubber prices in India are volatile and are affected by international factors along with local factors. Recently the rubber prices have been high. Factors which affect the rubber prices in India include:

International demand and supply

Like any commodity, the prices of rubber are affected by the demand and supply of natural rubber. Thailand, Malaysia and Indonesia being the largest producers of rubber play a key role in controlling the supply and in effect affecting the prices of natural rubber. Rubber is consumed in large quantities by countries such as USA, China and Japan. The rapid growth of the Chinese economy has led to a growth in demand for rubber. Due to this increased demand the international rubber prices have been steadily going upwards from 2001 onwards.

International market transactions

Rubber has become a commodity which is traded in the international futures markets. Some of the exchanges where rubber is traded are Tokyo Commodity Exchange (TOCOM), Japan’s Kobe Rubber Exchange (KOBE), Singapore RAS Commodity Exchange and Kuala Lumpur Commodity Exchange (KLCE). In India rubber is traded at National Multi Commodity Exchange (NMCE). Futures’ trading of rubber has been identified as one of the causes of high rubber prices prevailing in India.

Production of synthetic rubber

For many applications, natural rubber can be replaced by synthetic rubber. Even though natural rubber is never fully replaced a mix of both natural and synthetic rubber can be used. Hence large production of low priced synthetic rubber can affect the prices of natural rubber as it forms a substitute and competes in the same market place. However, since synthetic rubber is dependent on oil prices, a higher price of oil leads to a higher rise in price of synthetic rubber making it unfavorable among consumers.

Automobile industry

Automobile industry in the form of tyre industry is arguably the largest consumer of natural rubber. Growth in the demand for automobiles especially in China has led to greater demand on rubber. This has caused a further increase in the prices of rubber.

Government policies

India currently levies a custom duty of 20% on the import of rubber. This has been done to protect the prices of rubber producers within the country. However with prices soaring, such a high import duty is hurting the consumers especially the medium and small scale units. Government should ensure that when rubber prices are rising, they levy a lower import duty so that both the producers and consumers are not affected.

Oil prices

Oil prices have a large impact on the rubber industry. Synthetic rubber which acts as a substitute to natural rubber requires oil for its manufacturing. Traditionally, synthetic rubber has been cheaper to produce. However with increasing oil prices, the cost of making synthetic rubber has gone up. This has again increased the demand for natural rubber which in turn has pushed its prices upwards.

Seasonal changes and Climate changes

Rubber grows in tropical climate where the temperatures are high and rainfall is plenty. The climate in Kerala offers the best location for the growth of rubber trees. However, rubber cannot be tapped during the monsoon periods. Heavy monsoon season and peak summers reduce the rubber yield. This leads to shortage in supply and increase in prices as the demand would remain high.

Global economic condition

Global economic conditions such as recession affect the prices of rubber. Rubber prices had dipped to its lowest level in the past 30 years due to reduced demand and an increased supply from the South East Asian countries especially Vietnam which had doubled its production from 155 0 00 tonnes in 1995 to 320 0 00 tonnes in 2001.

Trading in Rubber Futures

In this section we will see how rubber producers and consumers can manage rubber price risk by purchasing and selling rubber futures. Producers can sell rubber futures (short hedging) to lock in a selling price. Similarly, consumers can buy rubber futures (long hedging) to secure a good cost price for the rubber. Similarly market speculators use futures to make the most of the movements of rubber prices.

What producers can do.

Producers need to protect the prices of rubber against any decline as it would affect their profitability. The following scenario depicts what a producer can do to hedge his risk against a decline in price of rubber. The producer would need to go short on the futures along with selling his rubber produce.

Assume,

A large manufacturer requires 1,00,000 Kg of rubber and has agreed with the producer to procure the required amount of rubber at market price on a future date. The spot rate of rubber is Rs. 170/Kg and the price of rubbers future contact is Rs. 167/Kg trading with a lot size of 5000Kg.

Therefore,

Amount required = 1,00,000 Kg

Spot Price = Rs. 170/Kg

Price of futures = Rs. 167/Kg

Lot size = 5000Kg

No of contracts = Amount required / Lot size

= 1,00,000 / 5,000

= 20

Spot price of rubber fell by 10% on delivery date to Rs. 153/Kg

Spot Price = Rs. 153/Kg

Amount to receive = Qty x Spot Price

= 1,00,000 x 153

= Rs. 1,53,00,000

Differential on futures = 167 – 153

= Rs. 14/Kg

= Rs. 70,000 per contract of 5,000 Kg.

Gain in exiting short position= Gain per contract x No of contracts

= 70,000 x 20

= Rs. 14,00,000

Net Amount received= Amount to receive + Gain from futures

= 1,53,00,000 + 14,00,000

= Rs. 1,67,00,000

As can be seen, if the producer did not take a futures contract then when the price of rubber fell from Rs.170/Kg to Rs. 153/Kg, the producer would have made a loss. However, since he went short on the future he was able to hedge his loss as the amount received is the same as he would have received had the price of rubber been at Rs. 167/Kg.

Spot price of rubber rises by 10% on delivery date to Rs. 187/Kg

Spot Price = Rs. 187/Kg

Amount to receive = Qty x Spot Price

= 1,00,000 x 187

= Rs. 1,87,00,000

Differential on futures = 187 – 167

= Rs. 20/Kg

= Rs. 1,00,000 per contract of 5,000 Kg.

Loss in exiting short position= Loss per contract x No of contracts

= 1,00,000 x 20

= Rs. 20,00,000

Net Amount received= Amount to receive – Loss from futures

= 1,87,00,000 – 20,00,000

= Rs. 1,67,00,000

As can be seen from the above examples, the downside of the short hedge is that the rubber seller would have been better off without the hedge if the price of the commodity went up.

What consumers can do.

Consumers like tyre manufacturers will need to buy large quantities of rubber to make finished goods. If the prices of rubber increase, then they can incur a loss due to decreased sales or profitability. The following scenario depicts what a consumer can do to hedge his risk against a rise in price of rubber. The manufacturer would need to buy futures in addition to the natural rubber.

Assume,

A large manufacturer requires 1,00,000 Kg of rubber. The spot rate of rubber is Rs. 170/Kg and the price of rubbers future contact is Rs. 167/Kg trading with a lot size of 5000Kg.

Therefore,

Amount required = 1,00,000 Kg

Spot Price = Rs. 170/Kg

Price of futures = Rs. 167/Kg

Lot size = 5000Kg

No of contracts = Amount required / Lot size

= 1,00,000 / 5,000

= 20

Spot price of rubber increased by 10% on delivery date to Rs. 187/Kg

Spot Price = Rs. 187/Kg

Amount to pay = Qty x Spot Price

= 1,00,000 x 187

= Rs. 1,87,00,000

Differential on futures = 187 – 167

= Rs. 20/Kg

= Rs. 1,00,000 per contract of 5,000 Kg.

Gain in exiting long position= Gain per contract x No of contracts

= 1,00,000 x 20

= Rs. 20,00,000

Net Amount paid = Amount paid – Gain from futures

= 1,87,00,000 – 20,00,000

= Rs. 1,67,00,000

This is the same amount which the manufacturer would have to pay for 1,00,000Kg of rubber bought at Rs. 167/Kg. Hence by going long the consumer has been able to hedge his risk against rise price of rubber.

Spot price of rubber decreased by 10% on delivery date to Rs. 153/Kg

Spot price = Rs. 153/Kg

Amount to pay = Qty x Spot Price

= 1,00,000 x 153

= Rs. 1,53,00,000

Differential on futures = 167 – 153

= Rs. 14/Kg

= Rs. 70,000 per contract of 5,000 Kg.

Loss in exiting long position= Loss per contract x No of contracts

= 70,000 x 20

= Rs. 14,00,000

Net Amount paid = Amount paid + Loss from futures

= 1,53,00,000 + 14,00,000

= Rs. 1,67,00,000

This is the same amount which the manufacturer would have to pay for 1,00,000Kg of rubber bought at Rs. 167/Kg. However, had the consumer not made a futures contract then he would have profited because of the decline in prices of rubber.

What speculators can do.

Buying futures during rise in rubber prices

If the rubber prices are expected to rise, then a profit can be made by going long, i.e. purchasing rubber futures contracts

Assume, that the current price of rubber is Rs. 170 per Kg and the lot size is 500

Current Price of rubber/Kg = Rs. 170.00/Kg

Lot Size = 5000 Kg

Value of Futures contract = Current Price x Lot Size

= 170.00 x 5000

= 850000

Therefore the futures contract is worth Rs. 8,50,000.00 . Since it is a futures contract the full amount need not be paid and only a margin has to be paid to get the contract.

Initial investment (margin of 10%) = Rs. 85,000.00

Assume that after a week the price of rubber rises to Rs 200/Kg.

Value of futures contract = 200 x 5000

= Rs. 10,00,000

Profit earned (on selling the contract) = 1000000 – 850000

= 150000

Net Profit = 150000 – 85000

= Rs. 65,000.00

Therefore a net profit of Rs. 65,000 can be made by exiting the long position.

Futures Contract – Going Long

BUY 5000Kg at Rs. 170/Kg

Rs. 8,50,000

SELL 5000Kg at Rs.200/Kg

Rs. 10,00,000

Profit

Rs. 1,50,000

Investment(initial margin)

Rs. 85,000

ROI

176.50%

Selling futures during fall in rubber prices

If the price of rubber is expected to fall then a profit can be made by going short i.e. selling the futures contract.

Assume,

Current Price of rubber/Kg = Rs. 170.00/Kg

Lot Size = 5000 Kg

Value of Futures contract = Current Price x Lot Size

= 170.00 x 5000

= Rs 8,50,000

Initial investment (margin of 10%) = Rs. 85,000.00

Now assume that the prices of rubber fall to Rs. 150/Kg.

Value of Futures contract = 150.00 x 5000

= Rs. 7,50,000

Profit earned (on closing the contract) = 850000 – 750000

= Rs 1,00,000

Net Profit = 1,00,000 – 85,000

= Rs. 15,000.00

Therefore a net profit of Rs. 15,000 can be made by exiting the short position.

Futures Contract – Going Short

SELL 5000Kg at Rs. 170/Kg

Rs. 8,50,000

BUY 5000Kg at Rs.150/Kg

Rs. 7,50,000

Profit

Rs. 1,00,000

Investment(initial margin)

Rs. 85,000

ROI

117.50%