26 July 2013 08:48 [Source: ICB]
This much is clear: Tyre sales are in the dumps.
Goodyear reported that it sold 1m fewer tyres in North America in Q1 2013 than during the same period in 2012. The second quarter is not looking any better, one automotive source said on 11 June, and most market participants do not see replacement-tyre sales - the most important segment for petrochemicals such as butadiene (BD) and styrene-butadiene-rubber (SBR) - turning around anytime this year.
What is to blame? That is where it gets complicated. For much of 2013, the blame has been put squarely on the shoulders of the petrochemical industry. "Butadiene is too high" has been a common refrain, which is usually followed by "that makes SBR too high".
Discounts that have been extended deep into the key summer driving season are not making up the shortfall in US tyre sales
It is not a self-serving argument. The contract price for US BD among the three producers that account for about 85% of the market has come down from 84 cents/lb ($1,852/tonne, €1,389/tonne) in March and April to 79 cents/lb in May. The June US BD price settled at 74 cents/lb among the three big producers. The fourth producer, which accounts for about 15% of the market, settled at 81 cents/lb, sources said, bringing the weighted average for June down to 75.26 cents/lb.
US BD has come down nearly 12% over the past three months alone. A year ago the contract price was $1.07/lb. The monthly contract price has not been as low as this since March 2010 when it was 70 cents/lb. Of course, BD has not always been this low. Over the past five years, the average contract price has ranged from 25 cents/lb in April 2009 to $1.75/lb in August 2011.
The contract price for SBR has come down as well. Over the past year, the average contract price for SBR 1502 has fallen by nearly 14% from 134 cents/lb to 115.5 cents/lb. The June SBR 1502 contract price is also down nearly 30% from a five-year high of 164.5 cents/lb in April 2012.
Despite SBR and BD being down from historic highs, tyres are still expensive in the US and European markets, sources said. That is because both tyre markets have chosen to focus on higher-end products made from solution SBR (SSBR) while ceding the low end of the market, which relies on emulsion SBR (ESBR), to cheaper Chinese imports.
"It's a conscious choice they made," said one market source. "And it makes sense given that the European and US markets are either mandating or about to mandate the low rolling resistance tyres that are made from SSBR. But given that, they can't put the whole blame on [petrochemicals] for slack sales."
That is a valid point, market sources said. But there is only one problem with that theory: Tyre makers have extended rebates further into the key summer driving season than ever before.
"Usually, the discounts stop before Memorial Day," one source said. "But I'm seeing them well into June. That tells me just how much trouble the tyre market is in."
BD and SBR prices are expected to fall further in the coming months, market sources said. That is because about 75% of BD goes into making SBR, 80% of which goes to make replacement tyres, a market that is clearly in a global slump. The other 25% mostly goes into making acrylonitrile-butadiene-styrene (ABS), which goes toward plastics for the automotive industry, as well as consumer electronics and appliances that are driven by the housing market.
While the US automotive market is doing well - automakers reported that US May auto sales were 15.3m annual units, up from 14.9m units in April - new cars only account for about 20% of the tyre market, so the new-car market's impact on BD demand is minimal. The US housing market, while improving, is still struggling.
Outside of these market fundamentals, US BD sources said that they are also concerned about European crackers that are completing scheduled maintenance and are slated to come back on line over the next month or so. With the European economy doing worse than the US, some market sources worry that European BD producers will look to sell their product at a discount in the US.
One US market source dismissed that scenario. "I think we worked our way through a lot of the excess BD leading up to the turnarounds," the source said. "It was offloaded to Asia before the turnarounds, and the European crackers will start back up at reduced rates, negating the need to arbitrage product to the US." That would be good news for US BD producers already under siege from less-expensive Asian-made BD and SBR. Indeed, instead of shipping cheaper BD to the US, which would cost about $400/tonne, Asian producers are converting less-expensive Asian BD to make SBR and then shipping it to the US, which only costs about $150/tonne.
US SBR producers have been among those pressuring domestic BD producers to cut prices to make US SBR - as well as BD - more competitive with Asian product. But what has both SBR and BD US producers concerned is the fact that Asian BD and SBR producers are operating at significantly reduced rates, and they still have excess product to ship to the US.
That reflects the relative slowness of Asian economies, market sources said, and no matter how low US prices fall, they may not be able to compete with Asian producers.
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