Even cheaper Chinese tyres?
While ChemChina’s deal with Camfin to take over Pirelli officially got under way this month, not everyone connected to the economy in the People’s Republic was looking so positive. The stock market has been in freefall and industrial production looks to have taken a big hit. The Chinese state’s answer? To devalue the national currency (the yuan renminbi or RMB) three times in a week and make already cheap Chinese exports even cheaper.
The problems of Chinese domestic oversupply and price deflation can be seen in both the automotive industry and the tyre industry that is intrinsically linked to it. For example, July passenger vehicle sales fell 6.6 per cent year-on-year and 16.1 per cent month-on-month, according to the China Association of Auto Manufacturers (CAAM). Analysts report that this is the second consecutive month that passenger vehicle monthly sales recorded both year-on-year and month-on-month declines. And what’s more, the 6.6 per cent year-on-year drop was the largest since February 2013. But it’s not over. Moving forward, the analysts predict that passenger vehicle sales will continue to slow in the remainder of the second half of 2015.
Saloon car sales were down over 20 per cent year-on-year in July, deteriorating from an already bad 15 per cent year-on-year drop in June. But when you put it in context, the picture is even worse. July was the sixth consecutive month that the local saloon car segment recorded such a decline. The good news is that SUV sales grew 34.6 per cent year-on-year in July and 44.3 per cent year-on-year in the January to July 2015 period, much stronger than other segments. As a result, SUV sales represented 31 per cent of total passenger car sales in July. The moral of this particular story? China is really increasing its appetite for SUV tyres. Down the line this means greater numbers of SUV tyres being produced in order to service this vehicle segment’s demand.
Speaking of tyres, comparable trends can be seen in the tyre sector and crucially for us in Europe, in terms of exports. According to customs statistics, from January to May China’s total tyre exports fell year-on-year, but the situation with reference to car tyres was especially bad. Exports of car tyres by volume fell 6.1 per cent; by value exports fell 17.5 per cent. January to June exports of car tyres to the United States fell by 40.6 per cent. Since the US Department of Commerce increased the duties in June, exports have fallen further.
Now we have set the scene, we must remember that all the above figures relate to pre-devaluation scenarios. From a tyre perspective at least, prices have already been falling shockingly low for some time. To give an example, in the UK leading manufacturers report they have encountered Chinese produced truck tyres selling at less than £100 each! (see the September issue’s Truck Tyre feature as well as the Retreading Special supplement for more on this). Such low price levels have mainly been caused by massive overcapacity and a distinct unwillingness for local entrepreneurs to engage in mergers and acquisitions, fuelled by the government’s unwillingness to allow closed factories to officially fail and be seen to be allowing thousands of job losses. Otherwise we would have seen much more in the way of market consolidation. Instead there are rumours that the Shandong landscape is now littered with shuttered tyre factories.
The global economy’s initial reaction to the yuan devaluation was a fall in stock and commodities markets, with investors questioning the strength of the Chinese economy. For example oil prices fell sharply in response to the initial devaluation, with Brent crude dropping by 2.4 per cent to $49 per barrel on 12 August (after the initial round of devaluations). According to Commerzbank analysts, WTI even shed 4 per cent to $43 per barrel – the lowest WTI closing price in six-and-a-half years.
According to Morgan Stanley analysts, whose recent investor’s note on the subject of yuan devaluation refers to vehicle production as an example, “although the new weak RMB is likely to stimulate OEMs’ export businesses, we don’t expect this to have meaningful profit contribution to OEMs such as Geely and Great Wall given their relatively small export businesses and weak demand in their traditional export markets. Moreover, we forecast the RMB depreciation to put pressure on profitability of these OEMs that have issued debt denominated in USD or other foreign currency due to the increasing foreign exchange loss.”
Interesting to know, but Morgan Stanley’s thesis doesn’t read across to the tyre industry. Unlike domestic OEMs, Chinese tyre makers are exporting huge amounts of product all around the world as well as unprecedented numbers into Europe in particular. With this in mind, Morgan Stanley’s comment that “the new weak RMB is like to stimulate…export business” is somewhat eerie and likely to stoke debate about whether or not European states should consider import tariffs in line with many other countries around the world. On the other hand, those Chinese manufacturing companies which have invested in non-Chinese production, especially those building in America with leveraged financial instruments, are now going to find such investments more costly than before. In this respect, what the Chinese government intended as an economy driving/export fuelling manoeuvre may also put pressure on the internationalisation exploits of some of its largest exports.