INSIGHT: More than a puncture kit needed for flat tyre demand

13 August 2013 15:00  [Source: ICIS news]

By Franco Capaldo

Tyre replacementLONDON (ICIS)--Flat tyre sales have been a worrying problem for styrene butadiene rubber (SBR) manufacturers. Many are waiting on the side of the road for assistance, a little pick-up in demand.

But no puncture repair kit or spare wheel is in the back of the car and no recovery van is on its way.

Improving tyre demand seems a long way off in the distance and this lack of activity is having a serious financial impact on companies linked to the industry.

According to an investor note from ratings agency Moody’s last month, sluggish tyre demand in Europe as a result of ongoing economic weakness in the region has exerted pressure on manufacturers of SBR, feedstock butadiene (BD), and other key tyre-making chemicals.

The report follows an announcement by the European Tyre and Rubber Manufacturers’ Association (ETRMA), which showed that replacement tyre sales in Europe continued their downtrend during the first half of 2013 compared with the same period last year.

The trade body said consumer tyre sales dropped by 6% year on year from January to June 2013, while agricultural tyres sales fell by 4% and motor and scooter tyre sales by 5%. ETRMA secretary general Fazilet Cinaralp said consumers cannot delay changing tyres any longer. "We seem to have reached the bottom," he said.

The association expects the replacement tyre sales market, which Moody’s estimates to account for 70-80% of all tyre sales in Europe, to reach 2012 figures by the end of 2013.

As a result of this slump, SBR consumption has also dropped significantly in 2013, which has in turn led to a fall in prices. 

On 7 August, ICIS assessed European SBR contract prices had fallen sharply on the back of poor demand and a 25% drop in the feedstock BD August contract price.

The August BD contract price dropped by €250/tonne ($333/tonne) while the co-feedstock styrene August contract price increased by €47/tonne in August. SBR contains approximately 75% BD and 25% styrene. European producers described demand as weak and the market as flat.

Spot prices of SBR and BD meanwhile have dropped steeply in Europe and Asia since the start of 2013, according to ICIS data, which Moody’s attributed to the oversupply of SBR as a result of new installed capacity.

The new capacity additions were driven by strong prices and volumes from 2009 through 2012, as well as anticipated future demand from emerging markets, and this has exacerbated lower pricing trends this year, according to Moody’s.

Replacement tyre sales in Europe were declining since the end of 2011 and many market participants expected tyre demand to recover in the second half of 2013, but we believe demand will remain depressed, if up versus the first half of the year which will offer little immediate support to SBR volumes,” Moody’s said.

Additional BD capacity in Asia is likely to squeeze prices further, making the possibility of relief for SBR producers less likely.

“SBR producers may also face more pricing pressure in the second half of the year because feedstock prices have also continued to decline as a result of weak demand and oversupply of butadiene due to the recent addition of extra new capacity by Asian producers,” the ratings agency added.

Moody’s identified Russia-based company Nizhnekamskneftekhim (NKNKh), US company Trinseo - formerly known as Styron - and Germany-headquartered group LANXESS as the most exposed to the SBR market’s woes, due to their respective levels of exposure to the sectors.

LANXESS already voiced concerns over an expected weaker 2013 at the beginning of the year. In March, the company predicted automotive production to fall by 8.5% year on year in western Europe during 2013, with auto tyre production sinking by 7.5% over the same period.

At the time, Axel Heitmann, chairman of the company’s board of management, felt the ongoing eurozone crisis meant auto and tyre sectors were being hit by a lack of consumer confidence. However, despite poor demand conditions Heitmann was “cautiously optimistic” for the full year 2013 and the company stuck to its 2014 and 2018 earnings before interest, tax, depreciation and amortization (EBITDA) targets.

In May, LANXESS said it was planning to implement cost-saving measures in its Performance Chemicals segment after posting lower earnings in the first quarter of 2013. It also said it was reducing its capital expenditure budget for 2013 to €600m from the previously planned level of €650m-700m.

Despite predicting the market environment would remain volatile, Heitmann nevertheless expected an economic improvement in the second half of this year, with hopes Asia, particularly China, perform substantially better.

Jumping forward to more recently, LANXESS has again released disappointing results, reporting on the 6 August that its second-quarter 2013 net profit shrank to €9m from €174m in the same period last year.

The company said continued weakness in demand in the automotive and tyre industries affected its sales. In contrast to its expectations in May, LANXESS now does not see an improvement in business conditions in the second half of 2013.

"Customers continue to destock their inventories, noticeably in Asia, and overall consumer sentiment remains weak," it said.

Group sales for the three months ending June 2013 declined 11.7% year on year to €2.14bn, with earnings before interest, tax, depreciation and amortisation before exceptionals falling 45.2% to €198m.

Looking at individual segments, in LANXESS’ Performance Polymers business, sales moved back by 17% to €1.2bn and EBITDA pre exceptionals decreased 63% to €94m as lower raw material prices led to a negative price effect, while volumes were down on account of lower demand from the automotive and tyre industries, it said.

The Advanced Intermediates segment saw a stable development in light of the solid demand for agrochemicals, but sales still were down 2% in the second quarter to €393m. EBITDA pre exceptionals fell by 6% to €74m as demand from the automotive and paints industries remained weak.

Meanwhile, sales in the group’s Performance Chemicals segment decreased by 4% to €561m, while EBITDA pre exceptionals fell 14% at €67m. LANXESS said although demand for inorganic pigments and water treatment products remained strong, the business units with an automotive and tyre industry exposure posted weaker results.  

“The first half of 2013 does not meet our own high standards,” Heitmann said on 6 August. “Trading conditions for our businesses remain tough and the fragile sentiment in Europe is now evident in other markets that are important for us, such as China and Brazil,” he added.

The German producer expects the business environment in 2013 to “remain challenging” as it targets a pre-exceptionals EBITDA of €700-800m this year, adding that a €1.4bn target for 2014 is “no longer realistic”.

However, LANXESS is maintaining its mid-term target EBITDA pre exceptionals for 2018 of €1.8bn. "However, we consider the achievement of this target to be a greater challenge," it said.

LANXESS also stated in its outlook for this year that automobile production will post only low growth, driven by demand in the US and China, while only weak improvement is anticipated for replacement tyre sales.

It added it is working on measures to mitigate the impact of declining demand and that an update of its strategy will be announced in September.

Of course, LANXESS is not on its own, just an example how low tyre sales are hurting many in the industry, but whatever the company does announce next month - how more streamlined it can make its operations and portfolio, or how it has found another way to keep costs down - it will only be a temporary fix.

What companies linked to the key tyre-making chemicals industry really need to get them back on the road to recovery is more replacement tyres.

($1 = €0.75)

Additional reporting by Tom Brown, Samuel Smith, Will Beacham and Pearl Bantillo

By: Franco Capaldo
+44 (0)20 8652 3214

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