Why Tyre Prices Are Increasing?
Many factory reports of tyre price increases, along with the recent price increases in steel cords and carbon black, have eventually led to the question: Are tyre prices going to rise?
The price of raw materials determines the production cost, and the price of tyres is influenced by consumer supply and demand. We’d like to give the following analyses on the above question based on these points.
• Price of the raw material
COVID-19 had a significant impact on the global economy in 2020. The second wave of infection and the third epidemic cycle has hit several countries in the northern hemisphere. And in the face of adversity, we do hope for the best. With more information on the COVID-19 vaccine’s launch and use, major economic research organizations worldwide are optimistic about economic growth in 2021. The next year’s expectations for significant economies are solid, which has sparked interest in the potential bulk commodity market. The cost of natural gas, steel, crude oil, copper, and natural rubber has been steadily increasing, resulting in a significant increase in petrochemicals’ price. The decreased global competitiveness caused by the outbreak and the expectation of a potential economic recovery has influenced the prices of many commodities in the spot market, forcing the price of manufactured goods to rise.
• TBR – An Indicator
The TBR (Truck and Bus Radial) tyre is an economic barometer; demand is unlikely to increase or decrease in the current sluggish economic environment. Outside China, tyre factories have had a very low yield in the last six months, which has left a portion of demand unmet. The recurrent disease situation has given Chinese tyre manufacturers many orders that would have previously gone to international tyre manufacturers.
With enough production space, Chinese tyre factories can easily accept these orders without having to boost prices. Furthermore, the northern hemisphere’s winter and holiday seasons, as well as an absurdly high sea freight rate, have reduced overseas end-user demand, which does not allow tyre prices to increase. The factory’s production costs, on the other hand, are steadily rising.
Another question that might come to mind is whether tyre prices appear to be rising but are falling in trend. Not at all. In the year-long epidemic scenario, the global tyre inventory is insufficient, and neither the supply nor demand sides can make a direct and definitive forecast about the economy’s future. Regardless of whether costs rise or fall, tyre dealers are unable to stock up. That is why, despite several price increases by tyre manufacturers, end-user tyre prices have remained unchanged.
• Ocean Freight
Finally, this year’s ocean freight rates have been skyrocketing, which has never been a factor considered. A significant number of containers are stuck around the world due to lockdowns and congestion at ports due to the long-lasting epidemic situation.
Since China has become the world’s leading manufacturer of life supplies, many containers loaded with export cargo have left China, but only a few have returned. We believe that the ocean freight rate will not reach a reasonable level until April 2021, based on various factors.
• Holidays for the Lunar New Year
In February 2021, China observed the Lunar New Year holidays, during which development was halted for nearly a month. This undoubtedly resulted in more shortages and higher shipping costs. In January and February of 2021, end-user tyre prices rose significantly.
How often do tyre price increases put retailers in a sticky situation?
Manufacturers of tyres continue to raise rates, citing rising input costs as a reason. Despite dramatic drops in the prices of raw materials used in tyres, manufacturers have never cut prices in the last ten years, even though their sales have soared. And they keep raising prices, citing high raw material costs as justification. As a result of the manufacturers’ supply cuts, retailers have reduced discounts and promotional schemes, especially following the lockdown. They are no longer able to service or attract their clients as well as they once did. All of this eats away at their profit margins, long-term viability, and survival.
Although dealers’ margins are eroding due to a lack of demand, the companies benefit from higher realization and lower input costs. Due to higher prices for the materials used in tyre production, domestic replacement tyre prices rise across the board in March and April. Following the lockdown, the businesses will raise their prices for the third time.
Manufacturer’s dilemma
Many domestic tyre firms have recently released price increase letters, stating that they will raise tyre prices collectively. Domestic publicly-listed tyre companies such as Shandong Linglong Tyre Co., Ltd, Zhongce Rubber Group Co., Ltd, Shandong Hengfeng Rubber & Plastic Co.,Ltd and Double Coin Holdings Ltd have all raised their prices up to 15%. For many businesses, Although this is not the first time a price increase notice has been sent, some people have claimed that they went to offline shops and discovered that the price of car tyres had not increased and that some models had reduced their costs.
This isn’t the first time the price tyre has gone up. More than 40 domestic tyre companies have released price increase notices since October. Zhongce, Fengshen, Linglong, Zhengxin, and Doublestar have increased their costs among other domestic tyre manufacturers. Tyre companies with foreign investors, such as Giti, have held up, with a combined price rise of more than 5% to 10%.
Local tyre companies in the island city have also increased their prices, in addition to the reported tyre companies. Many tyre companies have informed the reporter that they plan to raise costs, with the rise concentrated in the range of 3% to 5%, and some companies have increased by 10%.
The critical reasons for price rises are still rising raw material costs, such as rubber and carbon black.
“This time, the price rise is due to raw material price increases.” The reporter contacted Sailun Group and other Qingdao tyre manufacturers. According to the relevant person in charge, the higher production cost is still the prevailing price due to the rise in the price of natural rubber, carbon black, and other tyre raw materials—the primary explanation for the increase.
Natural rubber, synthetic rubber, carbon black, and other tyre raw materials account for the majority of tyre production costs, with rubber price fluctuations having a more significant effect on tyre production costs. According to a reporter, domestic rubber tapping activities have been hampered this year due to the environment’s impact. The production of foreign countries and Southeast Asia’s main natural rubber-producing areas has decreased year over year. There is a decline of 8.7% compared to the same time the previous year. Total production fell by 6.8% in 2020 compared to the previous year. Furthermore, warehouse receipts inventory remained low, pushing up prices and causing natural rubber prices to rise.
Carbon black can increase rubber strength and wear resistance when used as a reinforcement material in tyre manufacturing. Domestic carbon black prices have continued to grow since the third quarter of 2020, owing to high demand in the downstream industry chain and the elimination of backward production capacity. According to data, carbon black prices have risen by 31% since September of last year, and by more than 60% since the beginning of June.
The market’s decline has compounded the tight supply of carbon black market products. According to publicly available data, the carbon black market began to decline in November compared to the previous month. Carbon black businesses started operating at 72.92 percent, reducing 1.89 percent from the previous month. The heating season in the northern area, according to Huachuang Securities, also had an even greater impact on the coal tar-carbon black industry’s operating volume. Carbon black prices may continue to rise due to the downstream tyre industry’s higher operating rate and the urgent demand for carbon black replenishment.
