NATURAL RUBBER'S PRICE HIKE RESHAPES THE TIRE INDUSTRY
Soaring tire prices
Following last January’s floods in Thailand, prices for natural rubber and other raw materials used for the production of synthetic rubber have skyrocketed. Manufacturers ran for cover by increasing their price lists and reviewing their 2017 forecasts
"Can a butterfly flapping its wings in Brazil set off a tornado in Texas?" Edward N. Lorenz, American mathematician and meteorologist, also known as the pioneer of the "chaos theory", would probably answer Yes, so there is nothing strange then if, within a few weeks of the heavy floods in Thailand last January, almost all major manufacturers suddenly increased the prices of their tires. From Bridgestone to Pirelli, from Michelin to Goodyear, from Yokohama to Sumitomo, it seems that no one escaped the need to make a few adjustments to the price list, with percentage increases, depending on the target market, varying from 7% to 10% and beyond.
Same rubber, double the price
How do these two events relate to each other? Or rather, in the words of Lorenz: "How can a shocking climatic event in Southeast Asia send into a frenzy the whole tire sector as well as consumers"? The answer lies in the loss suffered by the production of natural rubber, one of the primary raw materials in the tire production process. Thailand, in fact, produces approximately 40% of the global supply of natural rubber. According to estimates, 7,6% of the total production of natural rubber in 2017 was lost due to heavy downpours at the beginning of the year. Besides, estimates were already disappointing in terms of quantity, due to the heavy drought that plagued the country in the months preceding the rains. And, as if that wasn't enough, the alarmism created in Thailand following the floods set off a race to grab the greatest possible quantities of the now precious material, with China leading the pack: the Asian giant’s trading volumes, in fact, are now twenty times higher than their Japanese counterpart. Furthermore, still China might have indirectly furnished an additional factor driving the price hike: recent Government incentives aimed at promoting the purchase of new cars in the country, created a boom of new registrations in 2016 (about 23.9 million new registrations), with the consequent explosion in the demand for raw materials, including natural rubber.
All these factors have driven the price of natural rubber sky-high, not to mention the price of butadiene, a flammable gas derived from the oil-refining process, used in the manufacturing of synthetic rubber, which soared to the highest price levels recorded over the last five years.
Price adjustments and 2017 forecasts
In order not to be sucked into the tornado triggered by the Asian butterfly, within weeks from the beginning of the year, manufacturers had no choice but to review the price list and apply, within a short period of time, a few adjustments on all their product lines. At the same time, premium brands started contemplating the possible effects on their financial statements, which led them to review their 2017 forecasts.
Japanese manufacturers, forced to cope with a rather unfavorable exchange rate besides dealing with the aforementioned issues, were among the first to contend with the critical situation at hand. The surge in commodity prices, according to Bridgestone's CFO Akihiro Eto, could have an impact equal to 137 billion yen (1.21 billion US dollars) on the company’s financial results. According to Eto, commodity prices should not remain at current levels for too long, however, it is hard to imagine that they will return to last year’s values anytime soon.
Due to this new market scenario, Yokohama too might experience a considerable cut in its 2017 operating profit forecasts: 24 billion yen (212 million dollars) to be precise, according to Gota Matsuo, general manager of Yokohama Rubber.
A decline by as much as 32 per cent of its estimated operating profit for the year is the sad scenario depicted by Sumitomo.
The fact that a problem shared is a problem halved will not bring much relief to Western producers as they expect hard times ahead, especially in 2017, when their pockets will shrink a little more than expected. The increased raw material costs could approximately account for a 900 million Euro cut for Michelin on estimated profits for the current year, which should be largely offset by the rising prices. According to Michelin’s CFO Mark Henry, the positive effect of lower raw material costs on the profits recorded in 2016 will be completely overturned in 2017. Announcing the new price list for the first half of the year, the leaders of the Clemont-Ferrand based company ruled out further price hikes during the year, even if costs should continue to rise.
Goodyear, among the first companies to review the price list with price increases already applied on some product lines as early as February, forecasts having to face rising costs for raw materials in the range of one billion dollars throughout 2017. In a recent press conference Richard Kramer, President and CEO of the company represented by the iconic Wingfoot symbol, said that raw material prices should remain high, but he also emphasized the extreme "volatility" and "unpredictability" of the situation as a whole. In view of the different scenario in each individual market, German manufacturer Continental decided not to apply higher prices across the range, but rather to adjust individual retail prices. Alexander Bahlmann, spokesman for the Hanover-based company, has also highlighted that the price increase of primary components could result in an overall increase in business costs of about 426 million dollars.
The last manufacturer to increase its prices was Pirelli. The top management of the company however, motivated the decision as depending not only on the higher purchasing price of raw materials, but also on the need for growing investments in the development of more competitive products.