Mr. Shen Jinrong: How long can the prosperity of China's tire industry last?

March 29,2024

“For Chinese tires, it is impossible to repeat the phenomenon of multiple influencing factors improving at the same time in 2024. Most of the positives will turn negative or slow down or decrease in magnitude. The cycle of the tire industry has reached a high point, and the problem of overcapacity in the industry will become increasingly prominent. We should take countermeasures.” On March 27, at the 2024 China Rubber Conference held by the China Rubber Industry Association, Mr. Shen Jinrong, senior vice president of China Rubber Association and chairman of ZC Rubber Group, delivered a speech titled "Can China's tire industry continue the prosperity of 2023 in 2024", which aroused strong responses.

In 2023, China's tire industry has enjoyed a rare good year in recent years, with all major indicators reaching record highs. According to statistics from the Tire Branch of the China Rubber Association, all indicators of the industry are in full swing, with major indicators such as output value, output, sales revenue, and profits all showing double-digit growth year-on-year (the same below). Among them, the annual tire sales revenue of member companies increased by 16.9%, sales volume increased by more than 20%, profits increased by about 2 times, and the industry average sales profit is estimated to exceed 6%.

Mr. Shen conducted a detailed analysis of the seven important factors currently affecting the profitability of tire companies.

Raw material price reduction is the biggest "good thing"

Data shows that in 2023, the price of tire raw materials has dropped by about 7% on average compared with 2022. The cost reductions for tire branch member companies are estimated to be between 10 billion and 12 billion yuan.

As raw material prices drop, cost reductions will be partially transmitted to tire selling prices, but their magnitude and speed vary greatly.

Mr. Shen believes that the decline in raw material prices is the biggest "good thing" for China's tire industry in 2023.

However, according to Mr. Shen's judgment, from March to April 2024, the average price of tire raw materials will return to the average level of 2022. There is a high probability that the average cost of raw materials for the whole year of 2024 will be significantly higher than the level of 2023. The factors affecting the average price of raw materials, in terms of classification, have changed from rubber to carbon black from 2022.

He said that if the average cost increases by 5% in 2024, it will basically eat up more than 50% of the profits in 2023.

Appreciation of U.S. dollar increases profits for export companies

In 2023, the official central parity rate of the US dollar against the RMB exchange rate has appreciated by an average of 4.44% relative to 2022. Mr. Shen estimated based on this that if the selling prices of products priced in US dollars by tire branch member companies remain unchanged, the increased profits in RMB would be between 6 billion and 6.3 billion yuan.

He believes that now that the U.S. dollar has stopped raising interest rates, the U.S. dollar exchange rate will move downward in 2024, but the time is difficult to predict. A rough calculation shows that every 1% drop in the U.S. dollar exchange rate will affect the tire industry's profits by more than 100 million yuan per month.

Profits of overseas companies have doubled

In 2023, Overseas subsidiaries of Chinese tire companies are still showing rapid growth momentum. According to analysis, the non-local export sales revenue of overseas bases has grown by about 35%, which is much higher than the average growth rate of 16.9%. Coupled with the fact that they also benefited from the decline in raw material prices and the appreciation of the US dollar, the profits of overseas companies increased exponentially.

However, with the increasing trade barriers and new changes in the international situation, Mr. Shen said that in 2024, the biggest uncertainty in the profits of overseas companies will be international trade disputes.

Hot selling semi-steel radial tires

In 2023, semi-steel radial tires are hot-selling, mainly in vehicle matching and export. Data shows that the annual sales of semi-steel tires by member companies of the Tire Branch increased by 25%.

Mr. Shen analyzed that China's passenger car production has grown rapidly in the past two years, but from a structural perspective, it can be seen that the growth is mainly concentrated in new energy vehicles, and sales growth is also mainly in exports. The mainstays of new energy vehicles and exported passenger cars are Chinese local brands. Passenger car tire matching has formed an obvious dual structure in the Chinese market, that is, joint venture brand cars are dominated by foreign brand tires, and local brand cars are dominated by local brand tires. Most of the member companies are local brands, which is one of the reasons for the increase in semi-steel tire sales in 2023.

At the same time, the consumption downgrade caused by high global inflation, the improvement of the manufacturing level of Chinese tire companies and the appreciation of the US dollar exchange rate have greatly stimulated China's passenger car tire exports. The exports of semi-steel radial tires by member companies of the Tire Branch in 2023 will increase by nearly 50 million units year-on-year.

Mr. Shen believes that in 2024, China's passenger vehicle production, especially new energy vehicle production and exports, will still increase, but the growth rate will slow down compared with the previous two years. The international market's demand for Chinese tires is already at a high level, and companies should increase their awareness of risk prevention.

All-steel tires have increased recovery

According to reports, in 2023, China's commercial vehicle production has resumed growth, driving an increase in the supply of all-steel radial tires, but it is still lower than in 2021. Exports of all-steel radial tires showed double-digit growth for reasons similar to the growth of semi-steel tire exports.

Mr. Shen said that in 2024, The demand for supporting all-steel radial tires should pay attention to the specific implementation of the State Council's "Action Plan to Promote Large-scale Equipment Renewal and Trade-in of Consumer Goods". However, judging from the current statement of "Accelerate the phase-out of operational diesel trucks with emission standards of National III and below", the impact on the improvement of the supporting market is limited. 

He believes that the domestic replacement market for all-steel tires has almost no growth; international market demand seems to have slowed down, and the biggest uncertainty for exports remains trade disputes.

Demand for off-highway tires is booming

Due to being at the high point of cyclical fluctuations, the demand for off-highway tires in 2023, especially large mining tires, is booming, continuing the market trend in 2022 and at a high market price. The off-highway tire business of member companies of the Tire Branch has grown rapidly and contributed significantly to profits.

Mr. Shen reminded that off-highway tires have entered a downward demand cycle starting from the fourth quarter of 2023, and the decline is rapid.

Enterprise exchange gains are large

Exchange gains and losses are an important factor affecting the profits of foreign trade companies. Mr. Shen analyzed that in 2023, tire companies have a larger export growth, and their financial statements reflect more net assets in U.S. dollars at the end of the period. Due to the appreciation of the US dollar, the exchange income in the report is relatively large, and its contribution to the total profit is estimated to be more than 3%.

He believes that it is unlikely that the US dollar will continue to appreciate in 2024, and depreciation by the end of the year compared with the end of 2023 is a high probability event. Mr. Shen said that the above factors overlap with each other and cannot be simply added up. Most of the positive factors will change in 2024, which should cause caution.

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