FocusLong-term tyre outlook points to less demand for US SBR, BD

25 July 2013 19:14  [Source: ICIS news]

HOUSTON (ICIS)--The good news for US butadiene (BD) and styrene-butadiene-rubber (SBR) producers is that Americans are still driving big, heavy vehicles that need their tyres replaced more often. The bad news?

That is about to change.

It is no secret that demand for replacement tyres, which account for about 80% of the BD and SBR produced in the US, is weak. Goodyear sold 1m fewer tyres in North America in the first quarter of 2013. When the Akron, Ohio, tyre maker reports second-quarter and first-half earnings next week, industry sources do not expect the news to be much better.

Most sources said on Thursday that they have given up on any kind of turnaround in the replacement-tyre market in 2013. The reason is simple: Most developed-nation economies are growing at about 1%, if at all.

Consumers, even in the US where GDP is growing by less than 2% a year, are putting off buying tyres so that they can pay the mortgage and buy food. Worse yet, forecasts for any sort of uptick in replacement-tyre sales in 2014 keep getting pushed out.

Originally, sources thought the market would improve in the first quarter, but now they are saying it will be more like second quarter of 2014, if then.

The one bright spot for SBR and BD producers has been US new-car sales, which are expected to be about 16m units in 2013, the industry's best year since 2007. But new-car tyres only account for about 20% of all tyre sales, so the US car-buying boom has been only marginally helpful to SBR and BD producers.

There is one thing that has definitely helped petrochemical makers, sources said: The fact that Americans still like big cars and trucks. Especially trucks.

US pickup truck sales have been booming over the past few months. Ford reported that June sales of its best-selling F-Series pickup trucks rose 24% from a year ago. It was the best June for Ford truck sales since 2005 and the 23rd consecutive month of sales increases for America's No 1 selling truck brand.

 In May, Ford also reported F-Series sales were up by 31% from a year ago, the first time the Dearborn, Michigan, automaker had sold more than 70,000 F-Series trucks in one month since March 2007.

General Motors has reported equally impressive truck sales numbers over the past few months. For June, GM said sales of its Chevy Silverado and GMC Sierra rose by 29% and 33%, respectively.

The world's biggest automaker also reported that June sales of heavy-duty pickup trucks rose by 23%, including a 49% increase in Silverado and Sierra sales to small businesses. That is important, automakers say, because a gradually improving US housing market has helped to boost pickup truck sales, especially the medium- and heavy-duty work trucks that are favoured by contractors and others in the homebuilding industry.

But, again, that is about to change, because US drivers will have to downsize.

The nation's government and its automakers are going to try and convince drivers to buy smaller, more fuel-efficient vehicles in an effort to meet increasingly stringent fuel-economy standards that are set to rise from 29 miles/gal (12 km/litre) to 36.6 miles/gal by 2017 and 54.5 miles/gal by 2025. That will impact SBR and BD demand because heavier vehicles wear out tyres quicker.

So while the 6,500lb (3,000kg) Silverado and 5,000lb F-150 that have been driving US auto sales to their best levels in nearly six years will still be popular, automakers will have to sell more 2,700lb Chevrolet Sonics and 3,600lb Ford Fusion Hybrids to meet the tighter average fuel economy standards. Because those cars are lighter, they need to replace their tyres less often.

"Automakers can't meet the CAFE [Corporate Average Fuel Economy] standards just by making vehicles lighter," said one Detroit source. "They're going to have to do it by changing the mix of sales. That'll mean incentivising drivers to buy hybrids and other high-fuel-economy cars instead of these behemoth SUVs."

There is another market shift that will reduce long-term demand for BD and SBR: eco-friendly, lower rolling resistance tyres. These are the new tyres that are being mandated from Europe to the US to China for their improved fuel efficiency and their eco-friendliness.

They are made with a different composite of synthetic and natural rubbber so that they offer less resistance to the road surface. As such, they tend to last longer, sources said.

"Better wear means you'll have to replace your tyres less often," said one SBR source. "So we have to seriously factor in what all this will mean for demand in 2015 or 2020. It will determine how we allocate resources for this new demand model. It's going to mean a big change for the industry."

And to all this the fact that Gen-X, the demographic that will drive consumer behaviour for the next 30 years, are expected to drive significantly less than the Baby Boomers, and one thing is clear, sources said.

Long-term demand for tyres and the petrochemicals that go into making them is going to decline.

By: Mark Yost
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