China Tire Report – January 2018

This is the latest summary of our analysis of China’s tire industry. We publish a weekly report on the tire industry in China. It is the only source of information in the English language for those who want to keep up-to-date with commercial, legislative, policy and recycling developments in the tire industry in China.

Since this was distributed to our subscribers at the end of December, there has been some significant news affecting the China tire industry. Our subscribers already know about this and can make decisions based on this intelligence, but readers of this column will have to wait another month before finding out.

Subscribers to our monthly newsletter also saw this column a couple of weeks ago.

China’s tire industry in December

December saw many tire makers announce price rises. It is still not clear how many of these have resulted in higher selling prices in the market. The limited information we hear is that overseas customers are paying less now than they did one month ago. Nevertheless, we continue to receive emails from tire suppliers advising customers that prices will definitely increase in the near future…

We are convinced that tire makers need these increases to remain profitable, as there have been more increases in input prices, and the Chinese government has imposed new taxes on emissions from 1 January. Meanwhile, prices of rubber have remained stable, so there is no tailwind from falling rubber prices as was seen in Q3.

Chinese-language documents report on the declining profits across China’s tire industry, and how the combination of static prices and higher costs are damaging profits. 

Furthermore, the wholesalers and tire makers remember the picture of a year ago, and hope to repeat that situation. Unfortunately for them, the reality of the marketplace is that there is still sufficient supply. With no shortages to drive prices up, there is little need for buyers to pay more for their tires.

Official factory utilisation rates are falling at PCR tire makers and remain constant at TBR factories. We are not sure if the PCR data represents factory closures, or whether it is a real effect. Either way, it means there is enough spare capacity in the business to encourage healthy (or not-so-healthy) competition.

Consolidation underway

All of this means pressure on tire makers in China continues to mount. We are seeing significant restructuring and bankruptcies throughout the tire industry value chain in China, from raw materials suppliers to tire makers and there are even rumours of problems at some tire wholesalers and exporters. 

In order to help manage the consolidation process, Double Star and Guangrao County have set up a fund to support M&A in the tire industry. The fund appears to be structured in a similar way to the fund Double Star established for its abortive acquisition of Kumho Tire shares. 

In specific examples, Double Star is leasing capacity from Hengyu. Pearl River Tyre is said to be on the point of collapse; Zhujiang Tire in Guangdong is said to have closed with substantial unpaid debts. We have other examples, but that is for our subscribers only.

Meanwhile, Linglong, Yanchang Rubber and others have announced new manufacturing facilities in China. The pattern appears to be reflecting our predictions made in August this year in our analysis of the consolidation in China’s carbon black industry.

We continue to forecast more IPOs and companies changing status in 2018. We already heard that Wanda Boto is to spin off subsidiaries; ChemChina is changing its structure into a “limited liability company (state-owned)”. 

Dongying City has said it intends to support IPO activity with grants to companies that successfully launch share issues. 

This consolidation is long overdue. Our view is that the faster it happens the better. Hence our suggestion to avoid paying higher prices for tires. To keep fully up to date with these changes, subscribe to our weekly newsletter. Each week we publish upwards of 50 stories detailing these changes, with full links to our original Chinese-language sources.

Emissions regulations came into force on 1 Jan

Just to underline how serious the China government is on emissions regulations we are seeing more regulation of tailpipe emissions for both light and heavy trucks, as well as incentives to buy electric and hybrid vehicles. We expect this to lead to further upgrades in the truck fleet. 

As the expense of buying and maintaining these relatively high-tech trucks increases, this is likely to drive single owner-operators out of the market and attract larger investors capable of building fleets of clean trucks. We think this is likely to favour the Western business model of buying high-value tires and looking after them and then extracting maximum value through retreading and re-grooving. However, we do not put a timescale on that. It will be a long, drawn-out process of change.

Meanwhile, the Chinese government has brought in new pollution taxes across the country. These vary by Province so that different Provinces have different penalties. Jiangsu has among the highest, while SOx emissions in Shandong are being taxed at high rates. 

To keep fully up to date with these changes, subscribe to our weekly newsletter. Each week we publish upwards of 50 stories detailing these changes and occasional analyses of the situation in China.

International trade

Early in the December, the U.S. declared that it does not recognise China as a free market economy. This makes it easier for the U.S. to impose harsh anti-dumping penalties on goods sourced from the country. 

Meanwhile, the EC said it will remove China from its list of non-market-economy countries. This will speed up all future anti-dumping cases, but not those already in progress, such as the EC’s current investigation into TBR tires from China. That investigation remains unaffected by the change of status. 

We are seeing the beginnings of a difficulty around the current EC investigation into TBR imports from China. The EC authorities have asked for more information from some Chinese tire makers, but the process is different from that of the US authorities, which the Chinese tire makers and their advisors have come to understand well

We hear that some Chinese tire makers think that the EC process will be delayed. The Chinese understand the US process, but this is the first time they have seen the EU process. We think that they have incorrectly interpreted the difference as a delay. This may impact decision-making in China and could potentially lead to shortages of some TBR tires in Europe if and when increased duties are announced. The investigation was announced on 11 August 2017 and a preliminary finding is expected within 9 months – that is to say by May 2018 at the latest.

Meanwhile, the European retreaders are working very hard on this project to demonstrate an excess of scrap tires in the EU due to Chinese imports and to show that more resources are being used, notably natural rubber, which the EU has defined as a critical raw material. We expect to hear more in this area later in January.

Their aim appears to be to focus on environmental issues as well as financial issues. My guess is that the new tire makers will demonstrate that their profits were eroded during the period under investigation. So we have something of a two-pronged approach from the EU. Environment from the retreaders; financial from the new tire makers

We think the Chinese will be taken by surprise by the environmental aspects of the case. They are unlikely to have prepared an argument in this area, since that has never been on the agenda in the US process. 

Meanwhile we note that China is adjusting its import tariffs on tires – mostly in the downward direction. 

Financial restructuring

Sailun-Jinyu went through a significant financial restructuring, having made a USD200mn private share placement. The money will be used to support construction of the company’s OTR/TBR factory in Vietnam. 

Sailun is undergoing a substantial management restructuring, following the change in share ownership that we have been reporting over the month. 

Mesnac has also gone through some significant changes, with a number of directors resigning, including the CFO. The resignations were associated with a restructuring of Mesnac’s logistics unit and robotics unit. 

– David Shaw

This article was printed in our monthly newsletter , published at the end of December, and summarises news and developments from our weekly report on the tire industry in China. For the latest information on the tire industry in China and the rest of the world, see our website at www.tireindustryresearch.com