Rather than easing the competitive pressure on global tire industry, declining raw-material prices in 2007 may actually put pressure on margins and cash flows, cautions a report published today by Standard & Poor’s Ratings Services “Peer Comparison: Global Tire Makers May Face Pressure When Raw-Material Prices Decline”.
“This is because pricing discipline in the industry may fade if tire makers start reducing prices on the back of lower input costs in the expectation of gaining market share,” said Standard & Poor’s credit analyst Werner Staeblein. “Therefore, declining raw-material prices could spark more price competition in the industry with likely more negative effects on earnings and cash flow generation than the positive effect from lower input prices.”
Standard & Poor’s long-term analysis of industry profitability has shown that tire makers achieved margin expansions despite higher input prices in the five years preceding 2006. For example, a comparison of the price development for natural rubber (one major input factor in the tire production process) with the average EBITDA margin achieved by a sample of nine tire companies shows that the industry expanded its margin levels to about 14% in 2005 from about 10% in 2001, despite rising natural rubber prices, mostly due to rational pricing behavior in the industry. The picture in 2006 was only different from preceding years because raw-material prices surged faster than tire makers were able to raise their own selling prices in the continued effort to recover the incremental burden from higher-priced input costs.
The report examines the strengths and strategies of five rated tire manufacturers, which together hold about two-thirds of the global market:
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— U.S.-based Cooper Tire & Rubber Co. (B+/Stable/–).
The oligopolistic structure of the industry, strong brand names, and high share of business in the tire-replacement market have helped tire makers to weather the major difficulties in this $100 billion industry over the past five years, the report says.
The three investment-grade rated companies have achieved high tire-related EBITDA margins, in the range of 11%-12% for Bridgestone, 13%-20% for Continental, and 13%-15% for Michelin over the past five years. This compares with an industry average of 10%-14%. EBITDA margins for Goodyear was 6%-9% and Cooper Tire were 5%-12% over the same timeframe.
