Decline in rubber prices set to boost margins of PSX's Tyre makers

July 16, 2025 (MLN): International rubber prices have plunged by 22% from their recent peak of US$2.21/kg in September 2024 to an average of $1.66/kg in July 2025, positioning Pakistan’s listed auto parts sector, particularly tyre manufacturers, to outperform in the near term.

According to a report by Sherman Securities, the sharp correction in raw material costs, coupled with volumetric growth driven by higher auto sales amid low car financing rates, bodes well for the sector.

Rubber prices had touched a seven-year high last year due to heavy monsoon rains and heatwaves in Thailand, a typhoon in China, and pre-buying ahead of the EU Deforestation Regulation (EUDR).

However, prices have fallen 17% in CY25 as EUDR was postponed by at least a year, uncertainty loomed over US tariffs on key rubber exporters, and lower oil prices led to a shift toward synthetic rubber, dragging natural rubber prices down as well.

The tyre segment, represented by companies such as General Tyre & Rubber (GTYR) and Panther Tyres (PTL), stands to benefit most. Crude rubber makes up around 25-30% of a tyre manufacturer’s cost structure.

While the drop in prices may cause minor short-term inventory losses, sustained lower costs could lift gross margins by 2.5–3%, assuming only half of the savings are passed on to consumers to stay competitive against imported tyres.

Pakistan is projected to consume about US$285 million worth of crude rubber in FY25, with tyre production accounting for roughly 15–20% of total usage.

Meanwhile, the segment appears attractively valued. The tyre industry on the PSX is trading at a price-to-book (P/BV) of 0.9x versus a 5-year average of 1.1x and well below the 2x seen five years ago.

PTL, which was listed on the PSX in FY21 at a P/BV of 2.4x, highlights the valuation compression.

Sherman Securities currently maintains a “Not Covered” stance on the sector but flagged these developments as favourable for listed tyre manufacturers.