Tire makers take it on the chin

(chinatrucks.com, Feb.26, 2010)Hit with a double whammy from skyrocketing raw material prices and lost overseas market share, Chinese tire makers may be forced to raise prices at a time when foreign rivals are quickly expanding into domestic markets.

In 13 months, starting in January 2009, raw rubber prices have soared 150 percent, meaning a price hike may be the only option left.

"A price increase would be reasonable," said one executive of the Triangle Group, a major Chinese tire producer based in Shandong.

"Manufacturers cannot afford rising costs too long," said the executive, who wished to remain anonymity.

Statistics from yunken.com, a rubber-industry research site, show that the price of rubber more than doubled to almost 25,000 yuan ($3,661) per ton Wednesday from around 10,000 yuan per ton back in January 2009.

Zheng Wenrong, secretary general of China Natural Rubber Association, said that industry demand coupled with a drop in natural rubber production in overseas markets led to the price hikes.

"If the rubber prices continue to go up, domestic tire makers will have to increase prices again in March by a reasonable margin to weather the current raw material price hike," said the Triangle executive.

Since December, Triangle has raised its wholesale prices by about 5 percent, with competitors Shandong Linglong Group and Hangzhou Zhongce Rubber Co Ltd following suit. That translates to about 80 to 100 yuan more per tire.

However, according to Chen Aihua, an analyst with Guosen Securities, inflated prices may let the air out of tire makers' bottom lines even more.

"Take steel-belted radial tires as an example. A 10 percent raw rubber increase will add 600 yuan to the cost of a tire."

Wang Guomei, director of overseas marketing for Shandong Linglong, confirmed that the company was considering raising prices by 6 percent in March.

With 40 percent of sales coming from overseas, China's tire makers hit a major roadblock last year as some countries - led by the US - imposed higher tariffs on Chinese tire imports.
 
The move was considered trade protectionism by the Chinese government as well some industry and trade experts.

The US decision to impose the tariff last September was said to be part of a campaign promise by US President Obama to crack down on imports that allegedly undermined US workers.

Given the existing trade barriers, Chinese tire makers have had to shift their focus to domestic markets in a bid to offset huge losses overseas.

"The booming automobile and machinery markets promise strong demand for tires," said Guosen's Chen. "Last year, China's vehicle capacity hit 186 million units, which indicates a promising future for tire replacement in China over the next three years."

However, global tire manufacturers have also noticed the huge market potential and international tire makers including Michelin, Goodyear and Continental began expanding their investments in China starting last year. Japanese tire maker Bridgestone and South Korea's Hankook also said recently they planned to expand production capacity in China to meet increasing demand.

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