The Tires They Are A’Changin’…
The falling price of oil, rebounding automobile sales, and a series of new government tariffs all brought mixed influences to the original equipment (OE) and replacement tire industry.
Lower oil costs, down nearly 50% from last year’s peak, have contributed to an already soft raw materials market, including synthetic rubber and carbon black used by tire manufacturers. OE business was strong in 2014, as sales of passenger and light truck (PLT) vehicles increased approximately 6%, to 16.4 million units in the U.S. and to 1.8 million units in Canada. Leading manufacturers generally posted positive results; Goodyear, for instance, reported record worldwide operating income in 2014.
Currently, distributors supply approximately 550 sizes of consumer tires across 100-plus branded and private-label offerings, and at least 20 new sizes will be added in 2015. Additionally, new tariffs were implemented in late 2014, making it even more challenging for distributors to serve their customer base of independent dealers, tire chains, and manufacturers’ retail outlets.
The U.S.-imposed punitive sanctions on Chinese-made PLT tires expired in September 2012. In September 2009, the U.S. had added a 35% tariff (lowered to 30% and 25%, respectively, in the second and third years) on these tires.
During June 2014, the United Steelworkers Union (USW) petitioned the U.S. International Trade Commission (USITC) for relief against PLT tire imports in China, as it had in April 2009. From 2011 to 2013, imports of these tires more than doubled, from 24.5 million to 50.8 million units, per the USW. As of 2013, nearly one of every four passenger tires, one of every five light truck tires, and one of every three medium truck tires sold in the U.S. aftermarket was built in China. The USITC voted to proceed with an investigation into anti-dumping (essentially selling below fair value) and countervailing (essentially unfair government subsidies) duties on certain Chinese imports.
As the investigation was proceeding, Chinese imports of PLT tires grew to 60.5 million units in 2014. The government rolled out a series of announcements that targeted not only the Chinese industry in general, but specific manufacturers. On December 24, 2014, the U.S. Department of Commerce revised countervailing duties announced just one month earlier, resulting in most manufacturers being hit with a 12.03% rate as of December 1, 2014, but retroactive for 90 days. The government agency was surely targeting those importers that brought in tires in advance of a determination date. One Company, Shandong Yongsheng Rubber Group, apparently did not cooperate with an investigation and was assessed an 81.29% duty.
Most domestic manufacturers have plants in China. As the replacement market was adjusting to the new duties, many companies began a series of price increases to recapture a portion of the higher import costs. Memphis-based Del-Nat Tire Corp., a co-operative distributor, citing the increased duty costs, including the 81.29% arising from purchases from Shandong Yongsheng Rubber Group, agreed to be purchased by TBC Corp.
Next, the government issued the antidumping rates on January 27, 2015; these were also retroactive for 90 days. Sixty-five specific manufacturers, including Chinese subsidiaries of Cooper, Bridgestone, Goodyear, Hankook, Kumho, Pirelli, and Toyo, were hit with another 27.72% duty, while most of the remaining companies saw a higher 87.99% rate. Adding to the market confusion is the fact that the rates are preliminary, with a final determination not expected until late July 2015. All countervailing and antidumping duties are in addition to the “normal” 4% duty.
Prior to the new duties, a firm performed a national survey of advertised pricing for the five top-selling sizes of passenger tires and four top-selling sizes of light truck tires in the U.S. Prices for major brands were nearly 33% higher than for low-cost passenger tires, and approximately 20% higher than for select light truck sizes, on average. As warehouses empty of pre-countervailing and antidumping low-cost tires, prices for low-cost tires will to continue to rise. How consumers will respond to a changing value proposition between tire brands remains to be seen.
For More information contact:
Gregory A. Baldor
Senior Valuation Director
Hilco Valuation Services