Sri Lanka’s CEAT ups tyre output amid import controls, holds prices
ECONOMYNEXT – Sri Lanka’s CEAT KELANI Holdings Plc, a joint venture with India’s CEAT group has boosted output 35 percent and is adding more capacity amid import controls but is holding prices, a top official said.
From June to September production of tyres had been increased 35 percent and the company was producing about 1,600 metric tonnes a month, Managing Director Ravi Dadlani said.
CEAT KELANI Holdings is a joint venture between Sri Lanka’s Kelani Tyres, a privatized state enterprise that engaged in import substitution and CEAT Sri Lanka, a Board of Investment approved globally competitive firm that exported half its output.
In April 2020 Sri Lanka slapped the worst import controls since 1971 when the Bretton Woods system of soft-pegs collapsed, after the central bank printed unprecedented amounts of money triggering forex shortages and driving the unstable peg (flexible exchange rate) of the rupee close to 200 to the US dollar.
Amid a global Coronavirus pandemic some of CEAT- Kelani’s export markets have weakened.
“Pre-Covid 68 to 70 percent was sold domestically and the rest was exported,” Dadlani said. “We can divert more of the export capacity to the domestic market because of the drop in export demand due to Covid-19.”
The company’s export markets include Egypt, Philippines, Zimbabwe, Nigeria, Dubai and South Asia.
In Truck Bus Bias ply (TBB) tyres the where the company produced about 80,000 out of a total annual demand of 100,000 to 105,000 tyres, the firm is on track to produce the entire domestic requirement, Dadlani said.
The firm has to capacity to make 150,000 TBB tyres per year. CEAT is also expanding truck bus radials (TBR) output.
In Truck bus radial (TBR) we were making 900 a month,” he said. “Now it is 1,800 units. It will be increased to 2,300 by the end of next month.”
The firm is awaiting the arrival of new moulds.
According to data published by publicly traded Kelani Tyres Plc, the joint venture produced 14,680 tonnes of tyres in the year to March 2020, as Sri Lanka’s economy slowed, from 16,074 tonnes a year earlier.
Two wheeler tyre output had been raised from 27,000 pre-Covid to 43,000 to 44,000 a month.
“We used previously underutilized capacity. Production has been increased 85 percent in two wheelers,” Dadlani said.
The company says it produces about 50 percent of the total requirements of tyres in Sri Lanka which is estimated at around four million tyres.
More capacity will also be added to Passenger Car Radial (PCR) and Utility Van Radial (UVR) segments.
The firm is awaiting clearance from authorities bring down engineers to commission a production line.
“Today there is 470mn equipment on ground waiting to be commissioned,” Dadlani said. “We are waiting for the machinery supplier’s engineers to be cleared to come.”
In about six to eight weeks car and van radial tyre output will up 45 percent to around 51,000 tyres from 37,000 units a month.
CEAT has also been buying more rubber from rubber farmers.
Dadlani said the company has not raised prices but is using the opportunity to expand sales and win new customers.
“We have not raised prices,” Dadlani said. “When the rupee depreciated (in the first quarter) we thought we would be compelled raise prices to pass on the cost. But now the rupee has stabilized. We have decided not to.
“Consumer is paramount. It is our company philosophy. This is an opportunity for us to increase sales. To get to get new customers to try and get then try and accept to our product.
“Our products are 25 percent cheaper (than imports).”
The firm has just added a heavy duty bias ply tyre weighing a solid 52 kilograms for prime movers and large trucks.
CEAT tyres are over engineered and can carry loads higher than the rated in trucks. In India many truck owners over load vehicles and drive large distances.
Dadlani said reliability is a key factor commercial vehicle operators look for.
CEAT has been investing in capacity and quality, Dadlani said. In the most recent 3 billion rupee program about 970 million had been spent only on quality improvements. This year about 1.1 billion rupees is being invested.
The firm had lost about 2.5 months sales due to Coronavirus lockdown, Dadlani said, which would be recovered with higher output.
In the year to March 2020 the joint venture posted revenues were 9.45 billion rupees down from 9.95 billion rupees a year earlier. After tax profits were 933 million rupees, down from 989 million rupees.
Publicly traded Kelani Tyres reported profits of 422 million rupees in the year to March 2020 or earnings of 5.51 rupees per share, with the JV bringing in 466.9 million rupees.
Sri Lanka’s import restrictions originally imposed in April and have been extended twice. The current extension is due to end in January.
Sri Lanka is aggressively chasing import substitution by protecting producers at the expense of consumers after printing money to create foreign exchange shortages, following a strategy popularized in Latin America by the likes of Raul Prebisch, the architect of Argentina’s central bank.
Sri Lanka has a Latin America style central bank, set up by Federal Reserve expert which has busted the rupee from 4.70 to 185 to the US dollar since its creation in the worst record in South Asia where currencies were derived from the Indian rupee.
Most stability has been provided by the Monetary Authority of Maldives which has free trade and per capita income of 11,000 US dollars.
The Fed’s Latin America unit, headed at one time by Robert Triffin, set up a number of central banks in Latin America reportedly inspired by Prebisch.
Import protected substitution products were expensive, uncompetitive in world markets and made entire value chains that depended on inputs also uncompetitive, critics say. Many of the countries also expropriated both domestic and multinational firms which were demonized.
High performing East Asian nations on the other had actively wooed foreign firms and had monetary stability.
The countries had persistent currency troubles and ended up in high inflation and sovereign default. (Colombo/Oct02/2020)