Date April 2016
Approximate net recovery on cost
- U.S. tire production increased 3.3 percent in 2015
- Lower raw material costs are improving margins for manufacturers
- Industry revenues: $46.8 billion (North American tire sales)
- Major product categories: Passenger, light truck, medium truck/bus, off-the-road (“OTR”)
- Significant manufacturers: Bridgestone Americas, Michelin, Goodyear, Continental Tire, Cooper, Hankook, Toyo, Yokohama, Sumitomo, Pirelli
- Market share of top: The three largest tire manufacturers comprise 58 percent market share in North America
- Recent sales trends: The U.S. tire industry has benefited from strong auto sales and low oil prices, boosting performance in 2015. But it continues to face stiff pressure from foreign competition along with challenges caused by an appreciating dollar
Industry posts solid growth: Boosted by record-setting auto sales and the effects of new anti-dumping duties, the production of tires during 2015 increased across the board in the U.S. to the highest level since 2011. The industry saw growth of passenger and light truck tires outpace import growth for the first time in years. Exports also expanded in all categories. Goodyear reported 18 percent growth in full-year segment operating income and nine percent lower sales (with most of the loss attributable to currency fluctuations). Fourth quarter earnings grew a record 16 percent in its North America business. Bridgestone Americas outperformed other regions during fiscal 2015, posting a 23.5 percent jump in operating income on 9.8 percent higher sales. Michelin noted growth in demand from North America as a contributor to its 12.8 percent improvement in net income for the year.
Recent anti-dumping duties significantly altered market: Tariffs imposed in January 2015 on tires from China reduced imports of passenger tires 53.2 percent during the year, marking a sharp reversal from record shipments the year prior. After the policy change, Chinese brands including Aeolus, Blacklion and Kingstar ceased distribution in the U.S., and some tire distributors faced losses when Chinese suppliers stopped shipments. Countries unaffected by the duties have stepped in to fill the gap. Imports from South Korea, Thailand, Indonesia and Taiwan all tallied double-digit increases in 2015. But additional interventions are still being considered. As recently as February 2016, the U.S. Commerce Department announced it would proceed with anti-dumping and countervailing duty investigations of imported medium truck and bus tires from China. It is also proceeding with similar investigations of certain pneumatic OTR tires from China, India and Sri Lanka. Liquidation values of Chinese tires imported prior to any new duties will likely come out higher while values of imports with the higher landed cost will likely be lower as they would be valued on a higher cost basis. Either way, the market value of the tires would likely not shift significantly.
Lower oil and rubber prices benefiting manufacturers: Tires are manufactured from both synthetic and natural rubber. Synthetic rubber is derived from polymers found in crude oil; it takes approximately seven gallons of oil to make one tire. When we last reported on this industry in June 2015, oil had fallen to just under $60 per barrel. In the subsequent seven months, its price has nearly halved. During the same time frame, the price for natural rubber traded on the Singapore Commodity Exchange dropped by one-third. These trends are improving margins for tire manufacturers. Goodyear reported its raw material costs decreased by approximately 11 percent in its tire business during 2015 compared to the year prior. The company is projecting a further decline of 9 percent in 2016.
Beyond decreasing raw material and energy costs, low oil prices have contributed to an increase of travel on roadways. In its December 2015 report on Traffic Volume Trends, the Department of Transportation’s Federal Highway Commission reports that travel on all roads and streets increased 3.5 percent (107.2 million more vehicle miles) during 2015 compared to 2014. More traffic volume means more tire demand.
Type of tire and origin of manufacture impact recoveries: Lenders should monitor inventory mix closely. The versatility of all season tires typically results in stronger recoveries, whereas seasonal tires may face steeper discounts. Similarly, truck tires tend to outperform industrial tires in liquidation. Origin of manufacture may also influence appraised values. Domestic tires tend to recover 5 percent to 10 percent higher on average than foreign ones. This difference is largely attributed to brand recognition as the market views brand power as a proxy for quality. Since imported tires lack such recognition, they are perceived to be of lower quality.