The tyre industry, burning the growth tracks from a boom in automobiles, is suddenly feeling short on muscle. That is, essential raw materials like steel cord and styrene butadiene rubber are in short supply. This comes on top of a steep rise in raw material prices. Surely, the road ahead looks bumpy.

One immediate concern, and the one on which the industry has no control, is the limited supply of butadiene rubber.

?Crude oil-prices have touched record highs in the last few days, putting pressure on companies to cut down on input costs of crude-based raw materials like butadiene. Since India does not produce butadiene rubber, we are completely dependant on imports, which is under tight supply, as companies overseas are either going slow on production or have been shut down temporarily to offset losses,? says Rajiv Budhraje, director-general, Automotive Tyre Manufacturers Association (Atma).

Confirms Kaushik Roy, head (corporate purchase), Apollo Tyres, ?Availability of butadiene is already low. Now with crude prices soaring, manufacturers are fast shifting from crude to gas to derive butadiene, which is used in polybutadiene rubber (PBR) and styrene butadiene rubber (SBR). Since, the yield of butadiene is far less from gas than crude, the supply has come down substantially.?

What adds to the uncertainty is the short-term supply contracts. According to Kaushik, because of the rising fuel prices, manufacturers now prefer monthly renewal of supply contacts, instead of annual contacts that were in vogue before the last two quarters.

The main raw materials for the industry are natural rubber, petro-based products and steel-based materials. Of these, natural rubber constitutes 42-44% to the total value. Petro-based products like PBR, SBR, nylon tyre cord, carbon black and rubber chemical account for 55-56%, and steel-based products like bead wire and steel cord make up the remaining 5-6%.

?There has been a disruption in raw material supply from major units in Western Europe where plants are being shut down to reduce losses. With Olympics round the corner, even China has seen closure of a large number of small and medium enterprises on environmental issues. Though this is a temporary disruption, in the short term, it will impact tyre production in India and might lead to a further price hike,? says Budhraje, adding that most Chinese players have put the supply contracts on hold.

In the last four to six months, the base price of natural rubber has gone up by 40% to Rs 135-Rs 140 per kg, PBR and SBR have seen an increase of over 100% and about 85% each at Rs 190 per kg and Rs 170-185 per kg, respectively. Prices of chemical rubber has gone up by 30-60% and those of bead wire and steel cord have risen by 45-50% at Rs 70-Rs 72 per kg and Rs 115-Rs 120 per kg.

Even natural rubber, which is produced in India, is expected to fall short of demand as a part of the production is exported. According to the Rubber Board of India, in 2008-09, the estimated demand for natural rubber is 8.99 lakh tonne. But India produces only 8.75 lakh tonne of rubber, thus, leaving a gap of 24,000 tonne. The situation was no different last year. In 2007-08, 36,000 tonne rubber had to be imported, since the local production of 8.25 lakh tonne fell short of the demand, which stood at 8.61 lakh tonne.

?While the export of finished tyres from India is around 20% of the total production, the country imports over 40% of its raw materials. This means we are a net importer and hence at a loss when the dollar strengthens,? says a Mumbai-based analyst.

According to Atma, the tyre industry in India is estimated to clock a turnover of Rs 20,000 crore in 2007-08. But consumption of raw material, at 13,39,000 mt, stands at 62% or Rs 12,500 crore of the total turnover.

Though production of tyres grew from 63,09,738 units in April last year to 66,73,255 units in April this year, a growth of 6%, exports almost remained flat. Export growth was a mere 0.5% in April at 4,71,313 units compared to 4,69,036 units in the same month last year.

Since the rupee has appreciated by 8-10% in the last three months, export has become even less competitive and this is further slimming the margins of tyre manufacturers in India.

To cope with this, the industry has made a series of price hikes since January, with the cumulative increase being in the range of 12-15%. According to Roy, though the hike in the domestic market is not comparable with global markets as products vary, it is indeed low when compared to the 25-30% hike in other countries during the same period. ?Despite a huge increase in raw material prices across all categories, players have not been able to pass it on to the customers completely and this is further squeezing our margins,? he says.

While battling these constraints, the tyre industry is faced with some major challenges ahead, including the entry of multi national players. ?The growing Indian economy and the huge opportunity that lies in the domestic auto industry are drawing the attention of a large number of global players. Hence, it is a challenge and also an opportunity for local players to enhance their quality and production capacity,? says an industry expert.

On top of all this, the import of cheap Chinese tyres has opened another front of uncertainty for the domestic players. These tyres are available at prices 30% lower than the domestic prices.

But a sobering thought amidst these gloomy scenario is that Indian industry has so far shown commendable resilience in the face of global competition and domestic constraints. The tyre industry couldn?t be any different.