Tire Tariffs trigger Price Competition

The world’s tire industry is waking up to fierce price competition, driven by tire makers in China selling below cost. This dire situation has been triggered by trade barriers erected in 2015 by the United States Department of Commerce against passenger car tires made in China. Ironically, these were implemented to reduce the import to the US of low-cost tires. Although the number of imports has dropped by around half, car tire prices in the Unites States continue to fall. Imports of Chinese-made passenger car tires to the United States have fallen by around half since the beginning of 2015 when the first estimates of import tariffs were published. [eventPDF] This fall is sharper than seen in the 2009 – 2012 period when the United States last imposed import tariffs. At that time, China exported around 40m passenger car tires to the US each year, and that fell to a minimum of 22m in 2011. The tariffs expired in September 2012 and Chinese exports jumped, reaching just over 50m units in 2014. The first half of 2015 has shown a decline of more than 50% in that figure. Figure 1 China exports of passenger car tires to US The US published final rates for the tariffs in June 2015 and this raised the barriers still further, with higher tariffs than preliminary estimates had suggested. Some Chinese companies have been hit with duties over 100%. As a result, most observers expect the total number for 2015 to be of the order of 20m or less. This change in volume from around 50m units/year to 20m leaves 30m passenger car tires looking for a new home. Chinese tire makers have become desperate, seeking export markets wherever they can find them, and slashing prices to win orders. Europe has become a favourite target, but some countries are more exposed than others. This has led to different market conditions in different countries. Countries with high exposure to Chinese imports are seeing greater falls in prices, so that the UK, for example has seen falls of around 10% since the start of this year in many sizes, whereas the German market has seen modest price falls in the 14- and 15-inch rim sizes, but prices in the higher profit large-diameter tires have increased significantly. Figure 2: Price development of tires by rim size The UK car tire market is made up of around 50% imports, whereas the German market is closer to 10%, many of those in the smaller 14- and 15-inch sizes. The UK has been especially hard hit with high numbers of Chinese imports. That, combined with the strength of the UK currency against the Euro has led to an increase in grey imports, as dealers in Eurozone countries see an opportunity to make some money. This rapid fall in prices has led many wholesalers to see a paper loss. They bought stock when prices were high but the plunging prices have led to significant stock valuation write-downs. In Russia, where the falling Rouble has unbalanced the market, prices are higher than in Germany, and even the Chinese have slowed their activities in the region to some extent. In China, tire selling prices track input costs, and input costs have been falling. Crude oil remains at or below $50/barrel, and this feeds through to the butadiene and styrene feedstocks needed to make rubber. Furthermore, the crisis situation in China’s tire industry is dampening demand. As a result, prices for raw materials are declining. Natural rubber is a case in point. In 2011 the price was around $6/kg. Now it is more like $1.35. Apart from a brief period in December 2008, these prices have not been seen for a decade. Figure 3: NR price has steadily declined since 2011 For budget tire makers, competing on price, aggressive price cutting by Chinese tire makers desperate to shift surplus stock is leading to bankruptcies and closures. Although only three companies have formally announced closure, the persistent rumour in China is that hundreds of tire makers around Dongying City have closed and many are unlikely to re-open. The three companies are: • Deruibao Tires (February 2015) • Beijing Capital (March 2015) • Shandong Fu Taier Tire (July 2015) But for Premium tire makers, the reduced input costs, combined with price increases in high-value products is leading to increased profits. In the last few weeks, most of the top tire makers have announced their first half results: Sales H1 2015 ($m)* margin 2015&dagger; margin 2014&dagger; sales growth&dagger; profit growth&dagger; Bridgestone 12209 13.95% 13.75% 5.85% 7.43% Michelin 11069 11.39% 11.35% 8.52% 8.89% Goodyear 7376 8.38% 3.19% -10.18% 135.99% Conti 5621 25.95% 15.55% 7.20% 78.91% Pirelli 3523 14.23% 14.56% 6.47% 4.03% SRI 2760 8.29% 9.60% 0.94% -12.84% Yokohama 1925 8.35% 8.35% 4.42% 4.46% * converted into USD using averaged exchange rates for the period &dagger; based on reporting currency figures Related Stories: Bridgestone showcases latest innovations and technologies at Frankfurt Moto Show

Tire Tariffs trigger Price Competition

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