Price and market trends: US tyre makers reduce production

12 April 2013 09:56  [Source: ICB]

Normally spring is when tyre makers think about ramping up production to meet increased demand during the summer driving months and the autumn selling season. No such luck in 2013.

Rather than ramping up, tyre makers are ramping down production amid a worldwide slump in tyre demand.

car tyre Rex

 Rex Features

Replacement tyre sales are sagging

One tyre maker said it is sporadically shutting down one of its US production lines for "inventory control" and another source said: "I won't use the phrase 'cautiously optimistic' because I don't believe we know what that means anymore."

Indeed, tyre demand was down by 10% in Europe in 2012 and is expected to be down by another 10% this year. In Asia, producers were recently ordered to empty warehouses to clear excess inventory. In the US, robust auto sales at a 15.5mn unit annual rate remain the one bright spot, while the replacement tyre market continues to struggle.

FEELING THE PRESSURE

Because of weak demand - both from car makers outside the US and in the replacement tyre market worldwide - prices of tyre raw materials are feeling downward pressure.

Butadiene (BD), a key component in styrene butadiene rubber (SBR), rolled over at 84 cents/lb ($1,852/tonne, €1,445/tonne) for April but is expected to drop by at least a few cents in May. Market sources say SBR is expected to at least roll over, if not drop by a few cents, when the April contract is settled. And nylon and acrylonitrile (ACN) prices are slipping because of reduced tyre demand.

US tyre makers have all but given up on growth in the first half of 2013, but are hoping that the tyre market improves along with better expectations for the US economy in the second half of 2013. "Business still looks weak in our three-month horizon," one tyre maker said. "Typically, we would ramp up a bit in late summer getting prepared for the tyre buying season, which is fall. Time will tell if we will be doing so this year."

US tyre shipments were unchanged in 2012 at 284m total units, according to a report issued by the Rubber Manufacturers Association.

According to the US trade group, a 10% increase in shipments to auto manufacturers offset a nearly 2% decrease in orders for replacement tyres.

For 2013, the group expects tyre sales to rise by about 4m units, or by 1.5%, to 288m units.

The group cited "a declining unemployment rate, a rebound in housing, and increases in vehicle sales and vehicle miles traveled", as the reasons for the increased production.

Tyre sales to automakers are expected to increase by 6%, or 2.7m units, in 2013. Replacement tire shipments declined in 2012 to about 235m units - a nearly 5m unit, or about 2%, decline. For 2013, the group expects a modest increase in replacement tyres of 1m units.

BD BUYER'S REMORSE

After the US BD contract price settled at rollover of 84 cents/lb, some market participants are having "buyer's remorse."

"I had buyer's remorse the minute it settled at rollover," said one disgruntled source.

"We've had fundamental softness in the market; it has to eventually play out in the price of BD."

The sharp decline in BD prices in Asia has opened up the arbitrage window to the US. Some US buyers are concerned that Asian BD could fall as low as $1,300-1,350/tonne.

US butadiene

If that happens, then it makes even more economic sense to ship Asian BD across the Pacific.

All of the downward pressure on BD prices has made buyers and sellers rethink their assessment for BD for the year.

In January, market participants had expected BD to slowly rise in the US and go back up above $1/lb.

"No doubt the price curve has come down," said one market player. "I still think it's going to rise later this year, but not nearly as high as everyone had expected."

Others were more sceptical of the promise of cheap Asian BD coming to the US.

"I'm surprised that [Asian producers] are taking a shot that US prices will stay high enough to keep it worthwhile," one market participant said.

"But then again, I wouldn't be surprised to see the Asian price drop further. The tyre business is really dead."

"The outlook seems rather foggy for BD and prices may not recover in April or May as expected earlier because the rubber and tyre industry still looks weak," an industry player said.


Author: Mark Yost



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