Japan tyre sales: August cooler after scorching July

by SR on September 10, 2012

Japan tyre sales, cumulative year-to-date (million units)

More of the same

The Japan Automobile Tyre Manufacturers Association (JATMA) released August sales data on 10 September 2012. In essence we saw in August a continuation of the trend of strong OEM tyre demand due to soaring auto production after the slump of 2011 and weak replacement tyre demand after a stellar 2011.

Total sales came to 8.49 million units, falling 1.1% year-on-year and down 11.5% month-on-month. Tyres for new cars (OEM tyres) posted a year-on-year loss of 0.1%, but fell 20.4% month-on-month to 3.57 million units due to the usual auto factory holidays. (Note that this gives us an early read on Japan auto production, figures for which will not be out until the end of the month but correlate very closely to OEM tyre sales.) Replacement tyres fell 1.8% YoY and 3.7% month-on-month to 4.92 million units. Total tyre sales for the period January to August 2012 have reached 73.74 million units, up 9.5% over the same period in 2011. Which is nice.

Thailand natural rubber prices in USD per kilogram

Tyre stocks

What does it mean for stocks? I still think Bridgestone is a buy with natural rubber prices falling the way they have been (see chart above). So far it’s been a good year as shown by the flurry of upward revisions from Japanese tyre companies when they announced (mostly stellar) results for the April to June 2012 quarter. (Note that the financial year at Bridgestone and Sumitomo Rubber is December, not March like most Japanese companies.) Despite this strength

If the markets decide that the threat of implosion in Europe is receding, the first things that will be bought will be companies like Mazda, Makita and NTN, all of which have a high level of exposure to the European market. After that, investors will look around for stocks that have been oversold on fears of a consumer slowdown in Europe and the US. I think Bridgestone will be one of these, as the trend in fundamentals remains strong and input costs in the form of raw material prices have plunged over the past year. Yet the stock is up just 8.4% compared to a 1.2% increase in Topix.

Share price performance of some Japan rubber stocks compared to auto/auto parts

Three big months ahead

Going forward, the catalyst will be end-of-year sales for replacement tyres. October and November are the biggest months of the year because that is when most of the winter (snow) tyre sales are made in Japan. If we have a snowy start to the winter we could see a surge in shipments. We already know that replacement demand in 2012 is likely to be lower than in 2011, but sentiment would be affected by either an unusually warm or cold winter.

However, the key factor is still not volumes – where growth overall for Bridgestone will be nothing special – but costs. While natural rubber prices continue to fall, the shares will remain attractive because (all other things being equal…) that means robust profit growth even on weak volume expansion. By early 2006 natural rubber prices had nearly doubled over the previous year – take another look at the chart above – and I expect that to have induced farmers to plant more rubber trees, which typically take 6-7 years to mature. If this hypothesis is correct and we get a rush of natural rubber mature acreage coming to the market in 2013, rubber prices will likely keep falling.

What are the risks?

These are the two main risks I see at this point.

  1. The China auto market recovers. I believe commodities speculators buy natural rubber futures as a play on the Chinese auto market, as they see it as the driver of demand at the margin. So if auto sales pick up in China, so will natural rubber prices. The net impact on Bridgestone would be negative, as China is only a small part of sales, probably 3-4%.
  2. Making too much money. Why is this a risk? Because if enough tyre suppliers decide that they have recovered the cumulative profits they lost over the past 6-7 years due to higher prices, we might see a return to market share battles. That would almost certainly take the form of using price-cuts to gain share or defend against others taking share after several years of price discipline that led to prices rising sharply (see chart below for the US experience). Price cuts would be good for consumers, but not good for the tyre suppliers.

US consumer price index for tires (1982-84 = 100)

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