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China Tire Report – March 2018

This is the latest summary of our analysis of China’s tire industry. We publish a weekly report on the tire industry in China. It is the only source of information in the English language for those who want to keep up-to-date with commercial, legislative, policy and recycling developments in the tire industry in China.

Since this was distributed to our subscribers at the end of February, there has been some significant news affecting the China tire industry, including the US review of PCR duties; rumours of shut-downs across Shandong from April – June and a series of ranking tables that we have published in our newsletters. Our subscribers already know about these developments and can make decisions based on this intelligence, but readers of this column will have to wait another month before finding out.

Subscribers to our monthly newsletter also saw this column a couple of weeks ago.

China’s tire industry in February

February is normally a quiet month in China due to the Spring New Year break. This year the holiday fell from 15th through to about 22 Feb. Nevertheless we have seen some major developments during the month.

Not least is President Xi’s declaration that he wishes to change China’s constitution so that he can have the job for life, scrapping the existing 2-term (10 year) limit. This was signalled last October when President Xi did not appoint a clear successor at the Party Congress in Beijing. Addendum: The NPC voted in favour of this change in early March.

Beyond Chinese domestic politics, the biggest issue was the EC’s announcement on 2 Feb that it requires all importers of TBR tires from China to register them, in the expectation that the EC will impose retro-active duties on these imports.

We have tackled this elsewhere, but the formal announcement triggered a great deal of speculation that the EC would –like the US ITC –soon begin an investigation into PCR tires imported from China.

We have no evidence of such investigations. No-one we have spoken to has any evidence.

Moving TBR production to Thailand, Vietnam

One of the easier reactions to the EC moves has been to suggest that Zhongce, Linglong, Double Coin and Sailun would use the Spring Break to move EC-destined TBR production to their overseas factories. In fact we proposed this development ourselves.

It appears this is more difficult than at first suggested, mainly because of REACH accreditation. Those factories were mostly set up to serve the US market, and as such are not accredited for REACH-compliant tire manufacture, with appropriate control of clean oils and so on.

We have heard that Linglong is in the process of moving production, but that others are being more cautious, based on the small volume available in those factories and the challenges of moving moulds as well as accrediting the factories for REACH in a short timescale.

Linglong becomes active

The next set of rumours concerns Linglong. About eight months ago there was a widespread expectation that Linglong would announce its second overseas tire plant in Serbia. This would be part of the company’s ‘3+3’ strategy to have three tire factories in China and three overseas. Linglong currently has two factories in China – in Zhaoyuan and Dezhou, and is building a third in Liuzhou – and operates a PCR/TBR unit in Thailand.

During the month – presumably at Tire Tech – reports surfaced that Linglong was about to make a formal announcement about a tire plant in Serbia. Linglong has denied those reports.

We do not think Linglong’s denial means anything other than Linglong has made no official announcement, so it will deny any rumours surfacing outside of China. We think Linglong is very sensitive to following the rules of the government and Party. Since the company has said nothing officially in China, it cannot be seen to admit to something that is not part of the official system in China.

Further reports suggested that Linglong has set up a technology licensing and engineering department to build a tire factory on behalf of an Iranian company.

Meanwhile, Linglong told the Shanghai stock exchange on 26 Feb that it has moved to a ‘5+3’ strategy with the announcement of a large new tire factory in Jingmen, Hubei Province, China. The total investment is CNY5300mn (USD850mn). Linglong expects to raise around 62% of the funds on Chinese money markets and is issuing convertible bonds and setting up a new subsidiary to manage the funding.

Linglong now says its overseas production bases will be the Thai factories plus a unit in Europe and two in the United States.

Critically, in its stock market announcements, Linglong did not mention any projects in Europe, aside from repeating generalised statements about its new ‘5+3’ strategy. It seems to us that the focus in Linglong is now much more on the domestic manufacturing base.

We are aware of the developments in Serbia and have spoken with some sources closely connected with the project. We know that planning work continues and that Linglong and its agents have negotiated a favourable deal in northern Serbia.

However, we are speculating that Linglong will delay the Serbia project while it focusses on the Hubei project. Addendum – there have been no further announcements up to 15 March on the Serbia factory.

The Serbia project could be placed under the ‘Belt and Road’ policy of the Chinese government, and is therefore eligible for government subsidies and accelerated foreign-currency approvals. However, we hear that the Belt and Road policy is increasingly viewed with suspicion in China, as many of the projects have become black holes of investment money.

China appears to be slowing down its aggressive overseas investments. This may be consistent with President Xi’s more China-centric policies and concerns about the outflow of capital from China. This view is supported by the cancellation of the Wanli project earlier in the month, as China’s foreign currency authorities did not authorise Wanli’s USD1bn investment.

Wanli project cancelled

As noted above, we heard rumours in early December that the Wanli project in South Carolina faced difficulties over the authorisation for foreign funds. We heard during February that the project has been ‘postponed indefinitely’, which is code for ‘cancelled’ and will not be revived. We are a little surprised that there has not been any official announcement, but we are certain of our information.

We heard late in the month at Wanda Group’s intended sale of CNY500mn bonds failed as the financial community showed zero interest in the notes.

New investments announced

Beyond the Linglong project in Hubei, we have heard that a number of companies are building advanced new factories in China.

  • Huaxing Wanda Tire (华兴万达) to build in Liaoning Province
  • Double Coin started production at its tire factory in Kunlun.

Double Coin announced the phase-2 expansion of Kunlun Environmental constraints continue It will come as no surprise to experienced industry-watchers that China continues to tighten restrictions on environmental emissions. The quiet period over the New Year holiday showed a remarkable improvement in air quality, serving as proof that industry is responsible in large part for poor air quality. Restructuring should improve profitability

Positive outlook

Finally, a securities analyst report says that restructuring, de-capacity and price increases will mean better profits at China’s remaining tire makers. The analysts looked at the industry and believe that the second half of last year was a low point for profitability. Car sales in 2015 hit a high, and this replacement demand is now filtering through to the market. As new vehicle sales stabilise at a growth rate of around 13% annually, the domestic tire industry is expected to see healthy double-digit volume growth based on replacement demand, starting from mid- to late 2018.

 

– David Shaw

This article was printed in our monthly newsletter , published at the end of February, and summarises news and developments from our weekly report on the tire industry in China. For the latest information on the tire industry in China and the rest of the world, see our website at www.tireindustryresearch.com

 

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