Recently, the tire industry has undergone sudden changes.
After the optimism of “full production and overproduction” faded at the beginning of the year, a completely different signal is spreading in the industry: Facing the dual squeeze of skyrocketing costs and overdrafted demand, some tire manufacturers are considering taking the initiative to reduce production in April.
According to field surveys of many tire companies in Shandong by relevant agencies, the industry has reached a consensus that the hot sales in March are likely to overdraw the demand in April.
In the context of the continued downturn in terminals, production reduction may become a helpless choice for companies to “self-rescue”.
The “scissor difference” between cost and demand
Behind this decision is the sharp deviation between the cost line and the sales line.
On the one hand, raw material prices have risen alarmingly.
In late March, the main contract price of synthetic rubber futures once exceeded 18,000 yuan/ton, with a cumulative increase of more than 60% during the year, historically surpassing natural rubber.
The cost of auxiliary materials such as carbon black also remains high.
On the other hand, cost pressure is difficult to transmit downstream.
Although tire companies generally issued price increase notices of 3% to 5%, in the fiercely competitive market environment, the transmission of price increases is extremely poor.
International brands even launched price reduction promotions in March, causing price increase letters from domestic small and medium-sized enterprises to become “empty letters.”
Research data shows that the theoretical profit values of semi-steel tires and all-steel tires have slipped into the negative range, and corporate profit margins have been extremely compressed.
“Overdraft” in March and April with hidden worries
The prosperity of the tire market in March actually hides hidden worries.
Affected by expectations of rising crude oil prices, downstream dealers carried out intensive stockpiling in early to mid-March, causing factory finished product inventories to fall to a low of 20-25 days.
However, this “jump start” overdrafted subsequent demand.
Many business leaders predict that the slowdown in shipments in April is a foregone conclusion.
The chairman of Zhongce Rubber once warned that the export growth in the first two months of this year was an “accidental” event, and it is expected that the industry will face downward pressure after June.
Current research shows that this pressure may come early.
With price increases difficult to achieve and recipe adjustments restricted, controlling operating rates has become the most direct means for companies to stop losses and manage cash flow.
Relevant investment research institutions clearly pointed out that most companies have production reduction plans, and there is a high probability of reducing operating rates.
Be wary of a recurrence of “catastrophic” price wars
What is more worrying than production cuts is the risk of price wars.
Looking back from April to June last year, under the double blow of sluggish demand and overcapacity, the industry experienced a vicious price reduction situation of “zero profit” or even “out of control channels”, which seriously eroded brand value and channel profits.
The current market environment is quite similar to last year: demand expectations are weak, channel inventory needs to be digested, and companies are facing huge financial pressure.
If demand falls as expected in April, will some companies adopt the banner of “exchanging price for volume” again in order to protect cash flow and market share?
This is a risk that the entire industry must be wary of.
Export differentiation, emerging markets become bright spots
On the export side, the industry shows a clear trend of differentiation.
Affected by geopolitical conflicts in the Middle East, some orders have been delayed, and trade barriers have increased, putting pressure on the growth rate of all-steel tire exports.
However, in terms of regional performance, the African market has become the biggest bright spot, with a year-on-year growth of more than 42% from January to February. Emerging markets such as Southeast Asia also maintained growth.
In contrast, mature markets such as Europe, the United States, and the Middle East performed weakly, and overall export resistance remained relatively large.
To sum up, as the game between high raw material costs and weak terminal demand intensifies, the tire industry is standing at a new crossroads.
In April, whether to choose to “cut production and protect prices” or fall into a new round of “price melee” will become the key to determining the direction of the industry in the second half of the year.
