However, low prices for consumers are a disaster for Gopalan Nair, a rubber grower from Thrissur, in the southwestern state of Kerala, who says his business is being destroyed by a collapse in local rubber prices caused by competition from cheap imports from Southeast Asia. "Tire companies are importing more than required, to suppress domestic prices," said Nair, who wants a complete ban on rubber imports to revive the domestic market.
Caught between rubber growers and tire manufacturers, who benefit from low rubber prices through higher margins, Prime Minister Narendra Modi's Bharatiya Janata Party government is leaning towards emergency help for the growers.
In mid-January, the government banned imports of rubber for use in goods for re-export and initiated an anti-dumping probe into synthetic rubber imports from the European Union and South Korea, which compete with natural rubber for some uses. Officials also placed restrictions on imports of natural rubber through India's major ports of Nhava Sheva and Chennai. The government acted after the Indian Rubber Growers Association called on Jan. 14 for immediate government intervention, saying that domestic rubber prices had plunged to an eight-year low of $1.39 a kilogram. The association called for an additional safeguard duty on rubber imports beyond the amount required by Indian industry, seeking to drive demand to Indian producers.
The group said imports of natural rubber had exceeded 400,000 metric tons in the first nine months of the financial year starting in April 2015, compared with 442,130 metric tons during the preceding 12 months. The association called for the introduction of a national rubber policy to help the industry.
The government had earlier raised the import duty on natural rubber to 25% from 20%, and cut the export obligation period -- the maximum time during which export goods are eligible for duty exemptions on inputs of imported rubber -- from 18 months to six months. Both measures will make imported natural rubber less attractive to manufacturers, compared with domestic rubber.
The first round of intervention followed a parliamentary panel report released last August that confirmed a trend of falling prices for Indian rubber and declining rubber production. The panel called for a ban on imports of natural rubber beyond the amount needed to bridge the gap between domestic production and demand; the regulation of imports during the peak natural rubber production season; and an end to "inverted" customs duties that are higher for natural rubber than for finished rubber goods, discouraging local manufacturing.
The panel also called for a review of a trade agreement with South Korea that specifies import duties of 10% on finished tires, compared with 25% on raw materials for local production. It said the government should restructure India's Rubber Board, tasked with promoting the industry; reduce agricultural and plantation taxes; and subsidize rubber growers through the official agricultural price stabilization fund.
"The ministry is likely to act on these suggestions soon," Chandan Mitra, chairman of the panel, told the Nikkei Asian Review. "The government should try to balance the interests of both [sides] -- rubber growers as well as industry."
Anti-industry
Commerce ministry officials did not respond to queries on the status of the panel's recommendations. However, the tire industry has taken "strong exception" to the actions the government has taken so far. The All India Rubber Industries Association and the Automotive Tyre Manufacturers Association called the port restrictions "anti-industry."
"Rubber prices in India are nearly 20% higher than international prices and any restrictions on imports will only hurt the [tire] industry," said Rajiv Budhraja, director general of ATMA, which represents the 11 largest tire making companies in India. "Import restriction is a temporary measure and India's import duties are already one of the highest in the world."
Tire manufacturers say rubber imports are needed to close a gap of almost 400,000 metric tons between domestic production and demand. "We are importing only to fill that gap," said Budhraja. "There is no excess import. The Indian rubber market cannot be seen in isolation, the volatility in international market is the major reason for the drop in prices." Budhraja said that Southeast Asian rubber producing countries were also suffering from low prices. "Do not push us to the brink," he said. "India is the only country where the demand for rubber is more than the supply. Too much intervention could destroy this equation."
The $10 billion Indian tire industry consumes 70% of the rubber produced in the country and exports to 75 countries. Three companies, MRF, Apollo Tyres and J&K Tyres, dominate the market, and all three figure among the world's top 25 producers.
The government's approach to the rubber issue is complicated by state politics. Kerala, which accounts for more than 80% of the country's rubber production, is set to go to the polls in 2017, and the BJP has high hopes of winning the state from the Congress Party, the main federal opposition party.
Nair said he believed the BJP was wary that the Congress-led state government in Kerala would take the credit for any intervention to help rubber growers if the federal government moved too quickly. Rubber cultivation provides a living for more than 1 million small growers who have an average holding of 0.55 hectares. "While others are leaving, I don't have an option but to continue growing rubber," said Nair.
Further complicating the issue, tire dealers are angry that the improved profit margins tire producers are making from cheaper rubber imports are not being shared with them. "Tire companies should reduce tire prices," said S.P. Singh, a New Delhi-based tire dealer and convener of the All India Tyre Dealers Federation. "[The] tire industry is resorting to cartelization as they don't want to reduce prices despite a huge drop [in the price of] raw material, which constitutes 75% of the total cost."
India is the fifth-largest producer of natural rubber, accounting for 7% of total world production, and ranks second in global consumption of natural rubber, using approximately 1 million metric tons a year, about 8.5% of world consumption. The parliamentary panel estimated that annual domestic demand for natural rubber may exceed 1.6 million tons by 2020, suggesting that India could become dependent on imports for much of its rubber if too many growers shift to other crops while prices are low. Rubber production dropped by 16% in the year to March 2015.
The price had fallen to $1.40 per kilogram by the end of the period, compared with average production costs of nearly $2.40 per kilogram. At the same time, rubber imports continued to rise strongly, more than doubling between 2011-12 and 2014-15, according to government data.
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