By Luigi Caffù. Published in Linkedin.

The annual results published by Michelin each year in February are always a nice starting point for analyses and discussions. The French producer is a worldwide reference for the Tyre Sector in general, and for the tyre market in particular too. The section of the annual report dedicated to the Market provides both numbers and comments.

This year I would like to focus on the European replacement market of Truck tyres, because it shows a growing trend in the recent years:

Source: Michelin (results 2016)

This trend is confirmed by ETRMA (which doesn’t include Turkey in the statistics published in the web, but the general trend is not impacted by this factor) which shows a continued growth from 2012 to 2016. It also shows another very relevant aspect: the regular growth of the “non-ETRMA” members’ market share on the total market, from 15% in 2012 to around 30% in 2016 (source: ETRMA Statistics 2016, you can find the pdf file in the ETRMA website).

The big part of this imported tyres comes from China. Michelin describes the situation with these words: “The sharp 6% rebound in Western Europe was led by the increase in freight tonnes carried per km and the rise in sales of low-cost tires from Asia, which are depressing retread demand.”

This “Chinese tyres flood” in Europe is also confirmed by Eurostat. The most recent yearly import statistics show this evolution for the import in EU28 from China (2016 Full Year is not available yet, but YtDate figures show a double digit growth and therefore 2016 will very probably be a new record high):

Source: Eurostat

This is not exactly the “non-ETRMA” part of the European market, because the imports from other Countries are missing; additionally, the official figures from Eurostat include also the volumes imported in EU by the ETRMA members. However, I am quite confident that it can be considered a good proxy for the “non-ETRMA” market share reasoning.

Here comes the big question that many professionals are wondering since time: how long will the market share growth of low-cost asian tyres last? Will it go on like this?

If we focus on the aggressive pricing offered by low-cost Chinese producers, we can come to the only conclusion that in the medium and long term their market share growth will be not sustainable.

The rational can be found in the Raw Materials prices: it seems that we are at the end of a long term declining cycle, ready to experience an inversion of the trend. In particular, when looking at Rubber, TSR20 (natural rubber) and Synthetic rubber seem to have radically inverted the trend, having bottomed at the beginning of 2016:

Source: Michelin (results 2016)

In the medium term, moreover, the growth of the raw material prices will likely be supported by the price of Oil, which seems oriented to a new positive price cycle in the medium and long term.

So…. why is this so important for low-end Chinese tyre producers?

They have been helped in the past years by declining raw materials prices, which have allowed them to sell their tyres at a continuously declining prices without losing their very stretched contribution margin. Now that the trend is reversing, it will be much more difficult to raise their prices if they do not want to lose market share vs competition. But, working with little (or no) profit on their sales, they will not have the flexibility to play with the tyre price in order to maximize the returns from their sales: they will have to go up with the prices, or inevitably incur in losses.

That’s why in the medium and long term the truck tyre import in EU of low cost products will decline.

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