By David Shaw, Tire Industry Research
If you work in the tire trading business, you’ve probably been receiving a series of emails from suppliers telling you about price increases. These are blamed on rocketing raw material costs
Yet there’s not much sign of prices increasing in the retail market. If anything prices are still going down in most markets. Furthermore, none of the premium tire makers is saying anything about higher raw material costs.
What’s going on?
Today’s strange situation gets right to the heart of the modern globalised tire manufacturing industry.
Most important to understand is the different cost structures of import brands compared with the premium brands. Another difference is the brand strength of premium tires compared to most of the Asian imports.
I’ve been talking for years about how the costs of tire makers is a huge aspect of the global tire industry competitiveness and warning that when raw materials prices rise, the Chinese tire manufacturing sector is going to suffer.
Here’s a chart of raw materials costs as a percent of total tire industry revenues over the last few years.
In India this data is very transparent, but in China, much less so. I have tracked the top six tire makers in India and added the total revenue figures and then calculated the percentage from the cumulative raw materials figures. The cost structure in China is fairly similar to that in India, with the exception that labour costs in India are a bit higher than those in China. (see this chart based on 2012 data)
Among the premium tire makers, only Michelin breaks out raw materials costs. Note that the pie charts refer to 2012, and the pie charts for the developed world show around 30% on raw materials, as reported in the line graph above.
The main take-away from this is that Indian and Chinese tire makers are much more exposed to raw materials price fluctuations than the premium brands.
Price increases good for premium brands; bad for cheap imports
That is to say, if raw materials prices increase by half, Michelin only sees its marginal costs rise by 10%, but low-cost tire makes see the proportion of raw materials rise from 50% to 75% of total revenues.
Premium tire makers can absorb that fluctuation for a short period, but the cheap tire makers have to raise prices immediately to compensate for the extra costs. If they fail to do that, then they quickly move from profit to loss.
Input costs fell from 2011-2015
A second aspect of this is that raw materials prices have been falling significantly after peaking in 2011. They picked up again in 2016, but I’ll get onto that below. Premium brands and cheaper imports reacted differently to that extended price fall.
All tire makers were forced to raise prices in the period from 2009-2011 to take account of very rapid increases in raw materials costs. The premium tire makers were able to maintain their selling prices more or less unchanged through 2012-2014, despite plunging raw materials bills.
As competition from cheap imports intensified in 2015, and 2016 premium tire makers have had to accept slightly lower prices. We track prices over that period and selling prices for tires are down by around 5% – 10% in Europe over the last three years. HIgh performance tires have seen a greater percentage drop compared to low-end tires, as competition increases.
However, margins have steadily increased at premium tire makers until the middle of this year. That has fuelled investments in capacity increases, modernisation, technology and diversification.
In China prices fell by by 40-45% over the same period as tire makers saw input costs fall. Instead of keeping prices high and using the money for future investments, they took the short-term view and slashed selling prices, while maintaining profits.
However, the last couple of years has seen particularly aggressive price competition and prices have been slashed so far that margins were under pressure, even before raw materials prices started to rise at the start of this year.
That’s all about brand strength. Premium brands were able to keep prices high because brand image plays a significant role in the buying decision in many developed countries.
Over the last couple of years, tire selling prices have fallen around the world.
Combined tire industry revenue has fallen by some 18% over the last three years, despite volumes up by some 9%. That’s a per-unit price fall of over 25%. This has mostly affected low-end tires. As we have seen prices in China fell by far more than this 25% average. In the last 12-18 months, even the premium bands have accepted lower prices as they have been forced to respond to the increased competition from Chinese-made tires
In China, and among most Chinese exporters, brand strength is minimal, so the only way different manufacturers can compete is on price. Tire importers and traders have learned this and the first subject in discussions between Chinese tire sellers and their customers in the US and Europe is to go through prices on each and every size and pattern. Some will buy different sizes from different suppliers based only on price.
This is the curse of a Chinese tire maker. You want to invest in technology; build brand and compete with Kumho and Nexen and Debica and Maxxis, but the price competition means you have to sell at suicidally low prices in order to get any kind of volume, and that leaves precious little spare cash for investments.
As a result, tire makers in China have cut margins in order to win business.
Faced with higher input costs, they are forced to raise prices in a more or less unplanned way in response to their cost structures.
As can be seen from the chart above, NR prices on the Shanghai Futures Exchange (red line) have risen from around $1.60/kg in January to $2.80/kg this month – around 75% increase in a year.
So that is the background. There was a small price bump in NR in April this year and tire makers in China tried to raise prices. The sought-after increases did not materialise as the dealers rejected the proposed price rises.
They are now trying again. This time, they have no choice. We saw the first increases in the domestic Chinese market in early November, with proposed price increases of 2%-5% or in some cases, promotional price cuts were cancelled.
Although export prices still have not risen most of the tire dealers we speak with have received notifications of increases, also in the 2% – 5% range.
We believe this is not enough to compensate for the increased costs at tire makers, especially those in China. Tire dealers should expect further increases in December and in January as tire makers play catch-up with rising input costs.
Into the future
It is a brave man who predicts the future. Especially where prices are concerned. Anyone who really knows would keep quiet and make money from the changes.
With that caveat in mind, here are my guesses for the coming months.
Prices of NR almost always rise in January/February as the dry season reduces yields. Most NR producers spend the months of November and December building up stocks, but this year that has not been possible as demand has been strong while yields have been low due to excessive rain.
Some believe that the excess rain will mean wetter ground, so that yields in the first two months of 2017 will fall less than normal.
Personally I think we are looking at the opposite effect: I think NR prices are likely to go up even faster in January as Wintering sets in. Another dimension is the oil price, and it appears that is set to rise after the recent deal to reduce supply between OPEC and the non-Opec producers.
My advice to tire makers is that they will have to raise prices further. My advice to tire buyers is to buy volume today and fill your warehouses, as prices will only go up in the future.
This analysis is based on our weekly China Tire Intelligence Report. Each week we publish dozens of stories that are not published anywhere else outside China, together with analysis and comment prepared by our team in China and edited in the UK by tire industry experts. This is the only such regular newsletter in the English language containing current information on the tire industry and upstream suppliers in China.