For 2018, tire manufacturers expect low single-digit volume growth. Goodyear Tire & Rubber Co. recently lowered its outlook to approximately 1.0% from 1.0-1.5% due to continued softness in China and Brazil. The Michelin Group reiterated growth in line with market. Continental Ag lowered its 2018 passenger car and light truck (PC & LT) replacement outlook to +1% from +2% due to dropping approximately 14 million units in the Asian market compared to expectations at the end of 2Q18. North America PC & LT replacement outlook remains unchanged at +2%, and North American commercial replacement outlook increased to +5% from +4%. Cooper Tire & Rubber Co. expects unit volume growth in the U.S. in Q4.
Manufacturers’ price increases were the story during the third quarter beginning with Goodyear and Michelin informing distributors during the beginning of August that 3% price increases would go into effect Sept. 1 on consumer tire products in the U.S. The remaining manufacturers all followed suit and the industry collectively increased prices in the 3-5% range over the following months. Early November conversations we conducted with U.S. tire contacts confirmed that these price increases are having no problem sticking despite a recent drop-off in raw material prices. Prices successfully sticking are being attributed to sustained improvement in sell-out demand into November and the industry collectively raising prices together. However, our contacts did caution us that if one manufacturer becomes promotional in 4Q18, others would likely follow.
On the raw material front, 3Q18 vs. 2Q18 spot prices revealed a 12% drop in natural rubber costs, while other commodities remained relatively stable with a 2% rise in oil prices, a 1%increase in China/SE Asia butadiene (U.S. Gulf is -1%), and marginal steel inflation which impacts steel cord/bead wire inputs. Continental’s 2018 raw material outlook is for natural rubber to decline by 17% (-13% prior), butadiene to decrease 4% (+6% prior) and carbon black and chemicals to rise 20%+ (increase 10%+ prior). Cooper Tire projected that their Q4 raw material index would be flat sequentially.
Since the end of the third quarter, raw materials have shot downward quickly, potentially endangering the likelihood of additional price increases and/or current increases sticking. China/SE Asia butadiene has dropped 37% (as of Sept. 9), U.S. Gulf butadiene decreased 28%, oil decreased 23% and natural rubber is down 5%.
Third Quarter 2018 Highlights
- Goodyear’s U.S. consumer replacement shipments increased 11% in 3Q18 which was above the U.S. Tire Manufacturers Association’s (USTMA) growth of 5% year over year (YoY). The company said there was no pre-buy benefit associated with planned price increases. Goodyear is seeing sustained improvement in sell-out demand noting a mid-single digit increase YoY during Q3, which is consistent with first-half results. As a result, the company stated channel inventory remains healthy. Goodyear indicated 2019 raw material costs will be up $350-$400 million vs. 2018, driven by foreign exchange and carbon black supplier headwinds. Lastly, the company acknowledged high customer retention and limited sales disruption associated with the transition of ATD customers to the new TireHub joint venture.
- Cooper Tire’s U.S. volume increased 1.5%, which was below the 5% industry growth rate despite a much easier comparison (-8% vs. industry -1%). Cooper did highlight that U.S. unit volume outperformed both USTMA and total industry in the month of September. Cooper expects unit volume growth in the U.S. in Q4.
- Michelin’s 3Q18 total replacement demand was flat with gains in North America and Europe being offset by weakening demand in China and South America. North American replacement channel volumes increased 3% in the quarter, in line with 2Q18. The company’s total price/mix growth was 3.5% during 3Q18, representing a slight sequential increase from the +3.0% price mix in 1H18. Michelin reiterated 2018 volume guidance of growth in line with total market growth.
- Continental’s PC & LT replacement demand in North America was up 3% during the quarter. Globally, Continental experienced a positive 3% price mix, which was more than offset by currency impacting tires sales negatively by 4%. 3Q18 North American PC & LT OE production came in slightly lower than Conti was anticipating heading into the quarter, but they raised their 4Q18 outlook as they expect some of that missed production to simply be delayed production. TR
Anthony J. Deem serves as vice president and senior research analyst at Longbow
Research and covers publicly traded light vehicle suppliers and tire manufacturers. Prior to joining the Longbow Research, Anthony Deem spent six years as an associate analyst at KeyBanc Capital Markets with a focus on light vehicle suppliers, tire manufacturers and automotive retailer stocks.
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