Tire makers 'facing more challenging trading conditions'

London – Global tire manufacturers could find it increasingly challenging to deliver the robust earnings performances seen generally over recent years.

That’s according to the latest HSBC Global Research analysis of costs, pricing, inventory levels in both OE and replacement tire markets worldwide.

One potential game-changer relates to raw materials costs, which are forecast to switch from being a tailwind to become a significant headwind for tire makers later this year.

After a record increase that began in mid-2020 and peaked two years later, raw material prices have declined since the second half of 2023, the HSBC analysts noted.

While they expect this decline to continue in first-half 2024, the equity experts see materials cost reversing into a year-on-year headwind in the second half of the year.

“Current spot prices imply that raw mats will turn into a headwind again from second half 2024,” according to HSBC Global Research.

Similarly, the report noted that shipping costs and energy prices had both also declined in second half 2023, “leaving an unprecedented tailwind to operating profits of tire makers.”

“Raw materials and other costs have been on a roller coaster since 2020, with 100% inflation in our index followed by a more than 30% drop since second half 2023,” the analysts commented.

They, therefore, listed the downside risks facing tire makers as including “greater-than-expected inflationary headwinds in the form of raw materials and energy inflation.”

Pressure on tire volumes could present a further challenge, the HSBC report projecting a “weak outlook” for mid-term growth.

“We expect below 2% annual volume-growth through 2025,” said the analysis, though noting that factors such as car parc, miles driven could support higher growth rates – especially if consumer purchasing power improves.

Nevertheless, HSBC Global Research has reduced its forecast for global light vehicle tire volumes by 1% for 2024, compared to its previous projection issued in December 2023.

The analysts went on to describe the outlook for OE demand as “weak” with a decline expected in 2024 and growth possibly remaining “muted” to 2030.

Regarding the replacement market, the report noted that "globally, tire aftermarkets have remained fairly stable compared to OE, and have recovered much faster after the Covid-19 declines.

“Nonetheless, we have been reducing our expectations for these markets since 2022, and [now] reduce this year forecast by nearly 1% versus our December 2023 estimates.” 

Going forward, HSBC Global Research said pricing strategies will be the key to profitability in the tire sector, with manufacturers now facing important decisions ahead of the expected cost increases.