INSIGHT: US SBR producers see flat margins despite higher tyre sales

17 August 2010 17:28  [Source: ICIS news]

Tyre shipments upBy Gene Lockard and Brian Ford

HOUSTON (ICIS)--Projected US tyre shipments and second-quarter tyre profits have increase markedly this year, but styrene butadiene rubber (SBR) producers say their sales margins have remained, well, somewhat flat.

The US Rubber Manufacturers Association (RMA) said last week that overall US tyre shipments for 2010 are projected to increase by about 8%, primarily as a result of a 38% increase in original equipment manufacturer (OEM) passenger tyres – those that come on new cars – and a 5% increase in passenger vehicle replacement tyres.

Total 2010 US tyre shipments are projected to increase to 282m units from last year’s 260m. The rebound in 2010 shipments would be roughly equal to 2008’s shipment level, according to the RMA.

Last week’s forecast is up from an increase of only 3% for 2010 that the RMA forecasted in March.

“The increase in tyre shipments reflects an economy re-emerging from the severe economic downturn coupled with the recent turnaround of the domestic automotive manufacturers and a return to established driving habits,” said the trade group, whose members include companies that make various rubber products, including tyres, hoses, belts, seals, moulded goods, and other finished rubber products.

“However, high unemployment, low consumer confidence and continued depressed home values continue to weigh on the consumer,” the group cautioned.

The group forecast increased shipments of OEM passenger and light truck tyres, as well as replacement tyres for such vehicles and for heavier trucks.

Shipments of original equipment passenger tyres were forecasted to jump nearly 38% for the year as a result of large increases in domestic vehicle production, which in turn was driven by incentive and financing programmes.

“With the economy predicted to stabilise and slowly emerge from the recession in 2010, a rebound in vehicle sales and subsequent vehicle production is anticipated,” the trade association said. “This will further increase [original equipment passenger] tyre shipments in 2011 by nearly 3m units to the 37m unit level."

Original equipment light truck tyres would increase by 13%, or about 400,000 units, to nearly 3.2m units, while original equipment tyres for heavier trucks would rise nearly 16% to 2.8m. Meanwhile, replacement passenger tyres would jump by a better-than-expected 5% to 199m; replacement light truck tyres would increase by 3% to 28m units; and replacement tyres for heavier trucks would grow by 15% to 15m units.

Major tyre manufacturers have seen a rebound in profits for either the second quarter or for the first half of the year.

US-based Goodyear Tire and Rubber on 29 July reported a second-quarter net income of $28m (€22m), compared with a loss of $221m in the same quarter of 2009, despite a sharp increase in raw material costs. Goodyear’s second-quarter sales jumped 15% to $4.5m.

Ohio-headquartered Cooper Tire & Rubber, a manufacturer of replacement tyres, saw a second-quarter net profit of $4m, compared with a prior-year second-quarter net loss of $13m. Second-quarter raw material costs were higher but began to moderate, the company said.

Tokyo-headquartered Bridgestone reported on 6 August a first-half profit of yen 44.5bn ($516m), up from a net loss of Y38.3bn in the first half of 2009 on a 15% rise in sales to Y1.386trn.

France-based Michelin, meanwhile, said it saw a first-half net income of €504m, compared with a net loss of €122m during the first half of 2009. First-half net sales were up 17% to €8.3bn.

But the better earnings and tyre sales numbers don't necessary translate into jubilation for US SBR producers, who say they have struggled to maintain their margins amid competition from lower-cost imported product from Asia and other countries.

In recent weeks, the arbitrage window between Asia and the US has opened, allowing a significant amount of SBR to be exported to the US. Imports early in the second half of August are continuing, a domestic SBR producer noted, adding that Korea, France, Germany, China, Taiwan, and Japan were among the countries exporting SBR to the US.

“I’ve been looking over some figures, and I’ve got indigestion right now,” the producer said.

The US spot price for 1502 in August was 113-120 cents/lb ($2,491-2,646/tonne) FOB US Gulf, while the August contract price for 1502 was 113-121 cents/lb.

By comparison, Asia SBR 1502 spot material for August shipments was $2,000-2,050/tonne (91-93 cents/lb) CIF (cost, insurance and freight).

Competition from imported SBR prompted another US SBR producer to consider price cuts.

“What choice do you have? If you have inventory and you want to move it, you have to cut prices,” the producer said.

The difficulty in cutting prices for domestic producers was that feedstock butadiene (BD) prices in the US have been much higher than in Asia. Cutting prices while feedstock costs were on the rise cuts into profit margins. BD makes up about two-thirds of the required raw material for SBR production, while styrene monomer accounts for the remaining third.

The BD price in the US rose by 49% between January and July on tight supply that resulted from a lack of crude C4, although much of that supply tightness had abated, a source said.

In the US, the August BD contract settled at 94 cents/lb ($2,072/tonne), a rollover from July, while in Asia, BD spot prices in first-half August were 73 cents/lb FOB northeast Asia and 75 cents/lb FOB southeast Asia.

One US SBR producer said that it had just begun importing BD from Asia to close the gap in production costs among regions.

“There’s no way we can compete when feedstock prices are so much higher here,” the producer said.

Another domestic SBR producer hoped that the loss in potential SBR sales to imported product would be a short-term situation, and for reasons other than freight costs, which were said to be about $1,100 for a 20ft container.

US tyre producers need a reliable source of material. The material from Asia is traded in the spot market, rather than on monthly contracts. Also, SBR buyers cannot always wait for 25-30 days for product to be shipped to the US from China. If they buy it here, they can get it in a day or two,” the producer said.

Another factor is that BD demand in China is beginning to rise, resulting in rising BD and SBR prices. On 16 August, BD prices in China were about 77 cents/lb, the producer said.

Still, if US SBR producers are correct, the fourth-quarter demand picture for domestic product could be dismal. While one US SBR producer said demand for the rest of the year would be flat to down, another producer was more pessimistic.

“If the SBR imports continue, we could see a bad fourth quarter. And don’t forget that buyers will want to liquidate their tanks late in the year ahead of the tax on inventory. It’s not looking good,” the producer said.

($1 = €0.78) ($1 = Y86.11)

Additional reporting by William Lemos and Helen Yan

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By: Gene Lockard
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