Why is Tire Production and Marketing in a Favorable Situation but Generating Few Profits?

“This year, tire production and marketing is in a favorable situation but not generating profits.” “This year, the tire industry sees a rise in production and income but not in profits.” “Distributors suffer a loss whether the prices of raw materials fall or rise.” These are the topics most discussed by tire manufacturers and distributors at the 2017 Members’ Meeting of China Rubber Industry Association Marketing Work Committee and the Operation and Management Forum for the Tire Industry respectively held on October 18 and 19 in Hangzhou.

“The major issue that concerns tire companies now is no longer the price of natural rubber or the benefit of factories, but the substantial rise in the prices of chemical raw materials and the short supply of them. Principal corporate leaders are all busy running about collecting raw materials. We have no idea how long the status quo will last. But it won’t change at least till the end of this year.” According to Shen Jinrong, chairman of Zhongce Rubber Group Co., Ltd., the difficulties facing the tire industry this year differ from those in the past. This year sees both price fluctuation and tight supply of raw materials. The factor of natural rubber price, which used to be the focus, matters not as much. Instead, the influence that other raw materials exert is greater.

According to Shen Jinrong, early this year, the rise in the prices of natural rubber and synthetic rubber was tremendous. The prices almost doubled before undergoing a violent fluctuation, contributing to a sharp fall in the profits of the whole industry. Despite a drop in the prices of natural rubber at present, the prices of raw materials including rubber chemicals, carbon black and cord fabric have surged. This is mainly due to the arrival of the heating season. Many coking plants have been shut down due to environmental reasons. The output reduction of coal tar—the raw material for carbon black—results in tight supply and significant rise of carbon black price, leaving the present price over twice that in last July and August. In addition, affected by the storm of environmental supervision and inspection, 50% of small rubber chemical plants are shut down. Limits on production are also set on the production lines of large plants, leading to the tight supply of products and significant increase in prices. Currently, some home-made materials are even more expensive than imported ones, severely affecting the normal production of tire companies. Since this year, tire companies have also been raising prices. The latest price adjustment has not influenced companies’ costs at all, i.e. their costs remain the same in spite of the rise in tire price. Yet the purchase of raw materials becomes harder. In his opinion, if such condition remains unchanged, the supply-demand pattern of the market will be affected, which might cause the tire industry in China to lose its overall advantages.

According to Shi Yifeng, secretary general of the Tire Branch of China Rubber Industry Association, influenced by the rise in raw material prices, the tire market saw strong demand and price rise in the first quarter of this year; in the second quarter, as the state strengthened efforts in environmental supervision and inspection, upstream companies producing raw materials such as chemicals and carbon black were badly affected and had to suffer tight supply and rising prices. Due to the violent fluctuation in prices of basic raw materials and weak consumption in the terminal market, the benefit of the tire industry dropped significantly; in the third quarter, many tire industries started to adjust production, reduce inventory and slow down its production growth rate.

Based on statistics of the Tire Branch, from Jan- uary to August, 41 major member companies enjoyed an (year-on-year, same below) increase in tire output by 8.11%, among which the output of all-steel tires increased by 8.13%, and that of semi-steel tires 9.54%; their sales revenues increased by14.5%, but their profits fell sharply by 65%; their inventory value increased by 16.67%. According to customs statistics, from January to July, the export volume of passenger car tires was 1,115,000 tons, increasing by 4.5%, with an export value of 2.917 Billion dollars, increasing by 8.5%; the export volume of truck and bus tires was1.89 million tons, dropping by 0.9%, with an export value of 4.111 Billion dollars, increasing by 5.4%.

Ge Guorong, deputy general manager of Zhongce Rubber Group Co., Ltd., said that the actual profits of the tire industry this year could be worse than what data in the statement indicate. For example, the profits of Zhongce from January to August dropped by 36.69% in its statement. The figure is in fact a little lower than the actual decrease due to the fact that the profits returned to distributors has not been counted in. The prices of labor and raw materials in China used to be low. But now, with the edge in labor gone, prices of raw materials rising and premiums of Chinese brands being low, it is difficult to pass the cost rise on to the terminal round. In particular, the supply-side reform in the tire industry is not yet in place, making it difficult to raise tire price to a proper level. Take Zhongce for example, the benefit generated by its plants in Thailand is more satisfactory than domestic ones.

It is learned that Chinese automobile manufacturers currently tend to keep the price of supporting tires low. Considering the large number of tire plants, they think that they can change their choices of supporting enterprises should any of them raise prices. Therefore, the more supporting enterprises they work with, the more pressure they will face. A boss told the reporter of China Rubber magazine of something as follows: Say, we discuss with an automobile manufacturer about raising prices. After seven to eight months’ discussion, the automobile manufacturer finally agrees on the price rise. But then the price of natural rubber falls, and it turns to argue against the price rise.

Ge Guorong thinks that as the current domestic price of natural rubber is the same as that abroad, Chinese companies are at the same starting line with their foreign counterparts. But rubber accounts for only 35% of the costs of foreign companies, whereas the number goes to 40%~45% on the part of Chinese companies. As a result, compared with foreign companies, Chinese companies are facing much higher pressure brought by this round of rise in raw material prices.

In terms of the tire market and price trend in the fourth quarter this year, most tire companies and distributors agree that the two will stay steady.

Liu Peng, vice president and sales director of Michelin (China) Investment Co., Ltd., thinks that the tire market will remain steady and will not see a price rise in the fourth quarter given the large amount of tire supply in spite of the modest increase in the natural rubber price and the significant rise in the price of supplementary materials. Cheng Wu, general manager of Urumchi Guangtong Industrial Development Co., Ltd., says that he is optimistic about the tire price going steady in the fourth quarter given that the market competition in Xinjiang is not as fierce as in the hinterland.

Liu Zhaoyong, general manager of Shanxi Minfeng Tire Rubber Co., Ltd., thinks that in the fourth quarter, the possibility is relatively low for the rise in tire price and high for the price to go down, although the possible decrease will be modest. At present, the supply of semi-steel tires in the market is much higher than the demand for them, and the money chain is tight, so there might be products sold at a price below their costs. Jin Penghui, chairman of Shenyang Ruihua Tire Co., Ltd., also agrees that in the fourth quarter, there will be a glut of tires, due to which some companies will arrange promotions more or less.

Pan Zhuoqiang, chairman of Snewcen International Trading Co., Ltd., says that this year, the price of natural rubber has fallen, low-proportion materials are in tight supply, and the trend of tire price still depends on such factors as the capacity, quality and brand of factories. Some factories with poor operation have already shut down. In the second half year, the distributors need not have too much inventory, but rather they should clear it and guarantee their money chain by the end of this year. Ge Yue, general manager of Kunming Meishuang Trading Co., Ltd., holds the same idea in that he thinks factories are diversified, some of which might alter prices.

Ge Guorong predicts that the export volume will drop in November and December despite the favorable export situation in the first three quarters this year. He believes it is the Chinese market that lays the foundation of the growth of the tire industry. This year, the growth rate of heavy truck tire industry is above 80%, and the output of Zhongce truck and bus tires increased by 20%, which is mainly seen in the field of supporting facilities. The business of First and Second Automobile Works is terrific this year, but whether their growth is able to last remains to be seen. Experts predict that in 2017 the growth rate of fixed asset investment in China will remain at around 8%, and infrastructure construction will continue to be the main force of stabilizing investment and growth; in the first three quarters, the logistics industry in China increased by 0.6%; the state started to obsolete national III standard automobiles. Nevertheless, at the same time, the 19th National Congress of the Communist Party of China has specified that houses are used for living in, and is going to control bubbles in the real estate industry, all of which will influence the development trend of the tire market.