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Over-capacity sedates realisations… - Views on News from Equitymaster
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  • Apr 7, 2001

    Over-capacity sedates realisations…

    Commodity industry is generally characterized by excessive supply and economy oriented demand. As a result, realisations are bound to fall as industry leaders augment their capacity to achieve higher economies of scale. The Indian carbon black industry is no different.

    The Indian carbon black industry is estimated to be worth Rs 8 billion (US$ 170 million). The key players in the Indian industry are Philips Carbon Black (PCB), Indian Rayon and Industries (IRYN), Cabot (India), Murablack India and Oriental Carbon Black Limited. PCB (37 percent), IRYN (21 percent) and Cabot (14 percent) command 72 percent market share of the industry.

    The industry is heavily dependent on the performance of the automobile sector. The user segments comprises of tyre and tube manufacturers and carbon brush manufacturers. Since carbon black is one of the key inputs for manufacturing tyres, higher auto demand will boost tyre sales, which in turn will have positive repercussions on this industry. There are more than 27 companies in the Indian tyre industry with an aggregate capacity of 30 million tyres per annum. Of this, buses and trucks accounts for more than 50 percent of tyre demand.

    Feed stock: Ever rising...
    (Rs/tonne) FY99 FY00 Change
    Cabot India 5,114 7,235 41.5%
    Indian Rayon 6,337 7,316 15.4%
    Murablack 6,040 8,022 32.8%
    Oriental Carbon Black 7,085 7,382 4.2%
    Philips Carbon Black 6,312 6,065 -3.9%

    Hence, demand for carbon black is very much dependent on demand for these heavy commercial vehicles. Apart from this, carbon black is also used as a raw material other segments like consumer products, automotive parts, printing inks and cables. However, contribution to demand from these manufacturers is negligible.

    Tyre companies feel the pressure…
    Rs/tonne FY99 FY00 Change
    Appollo 24,650 24,801 0.6%
    Ceat 27,276 28,760 5.4%
    Eastern Treads 28,556 28,415 -0.5%
    Elgi Tread 24,660 22,142 -10.2%
    Falcom 31,997 26,051 -18.6%
    Goodyear 24,633 24,936 1.2%
    Indag rubber 34,771 33,115 -4.8%
    India rubber 39,212 34,749 -11.4%
    JK Ind 23,714 25,339 6.9%
    MRF 25,755 29,327 13.9%
    Modi rubber 27,386 23,540 -14.0%
    Ralson (India) 29,648 26,196 -11.6%
    Ralson Ind 31,053 29,711 -4.3%
    TVS Srichakra 22,390 24,176 8.0%
    Vikrant 23,878 27,376 14.6%
    Carbon black is a highly raw material intensive industry. The main raw material used in manufacturing carbon black is carbon black feedstock (CBFS), which is largely imported. CBFS prices are highly dependent on crude prices. Hence, raw material costs increases substantially in the event of higher crude prices. This coupled with rupee depreciation tend to pressurize operating margins of companies. However, manufacturers cannot pass higher input costs to the end users because, one, there is oversupply in the market. As in any other commodity industry, overcapacity continues to cloud prospects of this sector. As a result, carbon black realisations are on the decline for the last three years. Besides, majority of tyre manufacturers import carbon black from South East Asian countries, which poses a potential threat to the domestic manufacturers.

    To put things in perspective, raw materials imported as a percentage of total raw material costs has gone up from 20 percent in fiscal year 1999 to 23 percent in fiscal year 2000 for MRF. Though this also includes other raw materials, import of carbon black component has gone up significantly over the last two years for the company.

    Secondly, there is every possibility these user industries could shift towards cheaper imports, which could further add to the woes of carbon black manufacturers. Despite this, companies have resorted to price increase in the current year, which has subdued demand.

    Analysis of the top 15 tyres and tube manufacturers reveals some interesting facts. Average purchase price of carbon black has gone up by 3.5 percent from Rs 25,748 per tonne (US$ 548) to Rs 26,662 per tonne (US$ 567). However, realisations per tonne are on the decline for Indian Rayon, one of the key manufacturers of carbon black in India. Average realisations per tonne have come down from Rs 30,000 per tonne (US$ 638) in fiscal year 1998 to Rs 27,284 per tonne (US$ 580) in fiscal year 2000, a decline of 9 percent.

    The outlook for the industry is also bleak. The removal of quantitative restrictions, post April 2001, will mean cheaper imports. This could further strain operating margins of the company. However, the Indian automobile industry is poised for higher growth in coming years as majority of multinational automobile companies have set up capacities in India. Automotive Component Manufacturers Association of India has projected total vehicle production to go up to 6 million units by FY02 from 4.8 million units currently. Besides, crude prices have also softened and as a result, CBFS prices come off from its high levels. These should bring some respite to the industry.

    But, given the oversupply in the market, will the industry be able to survive the onslaught of cheaper imports in the long run remains to be seen.



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