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 on 30 November, there has been some significant news affecting the China tire industry. Our subscribers already know about this 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 November
November finished with a series of restructuring announcements. The main news of the month, however, was Triangle’s much-trailed notice that it intends to build tire factories in the United States.
We put up a long story on LinkedIn, based on Triangle’s official announcements to the Shanghai Stock Exchange, but somewhat surprisingly, Triangle chose not to issue any statements in the English language. We think the company is awaiting final decisions on site selection and approvals from three ministries in China. At present only one of these has given permission for the project.
Restructuring international operations
Toward the end of the month, Michelin sold its stake in the Warrior PCR/LT factory in Anhui to Double Coin. We believe that – despite a series of articles promoting management successes – Michelin had not managed to persuade the workers that there was a long-term future for them.
Part of that was the fact that the factory made only low-end Warrior brand tires and Michelin restricted sales to domestic outlets only. There had also been little investment in technology – only in inspection and quality control systems. Furthermore, the workers could see that the Warrior tires were less favoured than the top-end Michelin brand.
Meanwhile, Double Coin wanted PCR/LT capacity in China and targeted the factory, which they already part owned. They asked the local government to force Michelin to sell its stake. Based on the fact that investment had been limited; the factory earned no export revenues and paid minimal tax due to on-going losses, the local government agreed. Michelin had to sell its stake.
In a third reconstruction, Sailun sold its stake in the UK-based retail and wholesale operation, Kings Road Tyres for GBP500,000. The purchasing company is a holding unit controlled by a manager of the business, Adrian Bader, however, the beneficial owner appears to be a company called Resolve Investments Limited. That is controlled by two directors: Stephen Isaacs and Jonathon Round. We think that this means the deal is a management buy-out supported by private equity.
It appears that KRT did not convert enough customers to the Sailun brand, and it continued to make losses, so Sailun has cut its connections with KRT.
Sailun also went through a restructuring of its capital, issuing new shares to the value of CNY1300mn in a private placement. This means company chairman Du Yudai directly holds 257,678,538 shares, accounting for 9.54% of issued shares.
MacroLink Holdings directly holds 328,772,553 shares, accounting for 12.17%, and thus becomes SLJY’s largest shareholder.
Upstream supply difficulties
At a meeting in Hangzhou during November, the Chairman of Zhongce Group (China’s biggest tire maker), Shen Jinrong told delegates that the biggest headache for tire company purchasing managers today is sourcing ingredients.
Prices have jumped due to shortages created by strong enforcement of environmental regulations, and it is not always possible to secure supplies, even by paying double the prices of a year ago.
He said that due to the new environmental supervisions, 50% of small (upstream) factories have shut down, and large factories are in limited production. This has led to domestic-made materials being more expensive than imported ones.
Because tire makers have struggled to raise prices, this means that some tire makers are now selling tires at below-cost.
His deputy, Ge Guorong confirmed this view and added that official profit figures have fallen, but even this does not represent the true situation, as many tire makers have offered dealer rebates, so that net revenues are lower than officially reported.
A year ago we said that pressure for consolidation in the China tire industry would mount in the final quarter of this year and the first quarter of next year.
We stand by that, and predict that many tire makers will close during the next six months.
This does not mean that tires will be in shortage. At the same time as the smaller companies are closing, the larger ones are adding substantial capacity. The good news is that this new capacity is largely modern, high-tech factories.
Our contacts say that the tires coming out of these new factories – many of which are not in China – are made to a better standard than tires made in the old, over-staffed factories on the Chinese mainland.
Heavy Truck sales
China’s heavy truck sales in 2017 have been running around 40,000 units/month ahead of the 2016 figure. Sales during 2017 are between 90,000 and 100,000 units/month compared with 60,000 to 70,000 during 2016.
Sales in August and September 2016 hit a minimum of about 50,000 units, just before new over-loading regulations kicked in. As we noted a month ago, the September 2017 figure of 101,110 units was double that of September 2016. Further research shows this was not especially significant.
Sales in October 2017 dipped a bit to 92,290 units, while the year-ago figure jumped in October and November due to the new rules. So while this year’s October sales figures are still 33% ahead of October 2016, it is looking like the November 2017 figure will be in line with November 2016, Any concerns about strong truck sales leading to a repeat of last year’s chaos have now retreated.
The disruption caused by the new rules a year ago has now filtered into the system and sales are now stable, albeit at a significantly higher level.
Tire price direction
Taking all the above into account, our view is that tire prices are likely to remain stable in the short term, but will tend to increase over a 6-12 month timescale.
We think that the market remains in over-supply and this is restricting the ability of tire makers to make price increases stick. Nevertheless, tire makers are under severe pressure as they experience shortages and substantial price rises for some small ingredients, including carbon black. Against that, prices of rubber are generally weak. There have been many price increase announcements, and tire makers are insisting that prices will rise, hoping to replicate last year's storm of increases. Nevertheless, we think few of these increases will stick.
Furthermore, environmental restrictions at many of the smaller tire makers will restrict their ability to manufacture tires.
Most of the more internationally-minded tire makers have by now installed good environmental control equipment, and this should allow them to continue production during the Winter months, despite anti-pollution measures by the government.
This combination of continued price competition and higher input costs, together with pressure from banks and other financial institutions will drive large numbers of smaller tire factories to close over the Winter, with a maximum around the Spring break next February.
Over the mid-term, this will permit prices to rise, but manufacturing costs will be correspondingly higher.
– David Shaw
This article was printed in our monthly newsletter , published at the end of November, 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