Japan tyres: Thundering past both 2011 and 2010 levels

by SR on April 10, 2012

The Japan Automobile Tyre Manufacturers Association (JATMA) released March 2012 Japan tyre sales data early evening 9 April 2012.

To begin with the conclusion: this was a solid set of figures. Tyres for new cars (OE tyres) remain very strong and Q1 sales have exceeded not only those of March 2011 – which was of course affected by the Tohoku earthquake – but also shipments for March 2010. This bolsters my confidence in tyre stocks as a neglected part of the market, especially given that natural rubber prices remain at significantly lower levels than obtained in 2011 while the environment for tyre prices remains very favourable. Note also that the OEM tyre data suggest that Toyota could post record global auto production in March 2012, which would be positive for its suppliers…

(Related tyre stocks: Bridgestone 5108; Sumitomo Rubber 5110; Yokohama Rubber 5101; Toyo Tire 5105; Michelin; Pirelli; Goodyear; Cooper Tire; Hankook; Nexen.)

Sales in Jan-Mar 2012 higher than Q1 in either 2011 OR 2010

March 2012 sales totalled 11.13m units, up 32.3% year-on-year and up 17.8% month-on-month. New car (OEM) tyre sales hit 4.82m units, rising 122.7% YoY and 2.4% MoM. Replacement tyre sales rose just 1% YoY but increased 32.9% MoM to 6.32m units. In other words, everything was up both month-on-month and year-on-year.

What I thought was even more interesting was the running total of sales in the first quarter (January to March) of 2012. Total shipments came to 28.46m units (the red line in the chart below), which was higher – understandably – than the 24.9m units of the first quarter of 2011 (the blue line) by 14.4%, but also exceeded the 26.9m units of January to March 2010 (the purple line) by 5.7%. In other words, these robust figures are not just a product of the low base and easy comparison provided by March 2011. (Click on the chart for a larger image.)

Cumulative sales of Japan tyres

OEM tyres soar year-on-year, but post small month-on-month gain

It’s no surprise that OEM tyres rose 122.7% YoY in March 2012 but some investors may view the +2.4% MoM figure with concern. It is true that, as the following chart shows, OEM tyre shipments usually rise from February to March by 5-10% rather than the low single-digit increase just posted. Nevertheless, this has to be taken in the context, which is that this figure came on the heels of several months of strong auto production. (Click on the chart for a larger image.)
Month-on-month change in OEM tyre sales in Japan

The chart below allows us to visualise that context. 2010 was a pretty good year for tyre sales in Japan, yet 2012 OEM tyre sales up to the end of March 2012 have outstripped sales for the same period in 2010 as well as in 2011. (Compare the red line in the chart below to the purple and blue lines; click for a larger image.) So I’m not much concerned about one lacklustre month in March 2012. The point is that demand remains firm – it did rise, after all – and that will keep tyre capacity utilisation high and prices tight. That’s all good for tyre suppliers.

Cumulative sales of OEM tyres in Japan by month and year

Replacement tyres rather ho-hum; no excitement here

The good news is that replacement tyre sales did rise year-on-year in March 2012, albeit by only 1%, suggesting continued strong demand. Seasonal demand was normal, rising 32.9% which is about what you would expect for March. Nevertheless, despite the year-on-year growth in March we have several months of tough comparisons coming up.

Look at the blue line in the chart below, which shows 2011 replacement tyre sales. As you can see, not only did replacement tyre sales not fall after the earthquake, but they also performed significantly better than usual in April, May and June 2011, creating a ‘bump’ in demand. (I attribute this bump to hoarding after the earthquake and to buying ahead of price increases implemented on 1 June 2011.) That bump sets a high hurdle for 2012 replacement tyre shipments and I’m guessing that we’ll have 2-3 months of negative year-on-year growth as a result. (Click on the chart for a larger image.)

Replacement tyre sales by month and year, million units

Frankly, I think we’ll struggle to post an increase in annual replacement sales in Japan unless sentiment improves rapidly over the next few months. Still, Japan represents less than 30% of sales at the leading tyre supplier, Bridgestone, and our focus has been more on the US market (more than 40% of revenue) than on Japan’s domestic market.

Auto production remains steady

OEM tyre sales are tightly correlated to production of autos, which is logical when you consider the just-in-time nature of auto production within Japan. As data for Japan auto production in March are not released until the end of April, the OEM tyre sales data gives us an early and usually reliable insight into auto production, which is the primary short-term driver of auto parts demand (think Denso, Aisin Seiki etc).

If we assume that production of autos rose 2.4% month-on-month (the same increase as that posted for OEM tyres), wouldn’t that be rather disappointing given that auto output usually rises by 10-12% MoM in the month of March? No, because we are already at a remarkably high level. That 2.4% MoM increase I posit above would bring Japan’s auto output in January to March 2012 to 2.76m units, up 45.1% from the same quarter in 2011 but also up 8.8% compared to the first (January to March) quarter of 2011.

Here’s a chart of Toyota’s global production as a proxy for Japan’s output. Toyota’s peak production was 821,000 units in October 2007, but February 2012 output was 811,310 units. An increase of just 1.2% MoM globally in March 2012 would see Toyota’s highest ever auto production. That is, not just the highest since the global financial crisis, but the highest in the company’s history. That has to be positive for auto parts suppliers.

Toyota global production by month

So, tyres the place to be still?

I like the look of the tyre market this year, particularly the US tyre market for replacement demand and Japan’s OEM market, strength in which which will act to keep capacity tight globally and keep upward pressure on tyre prices. Meanwhile, natural rubber prices – by far the most volatile element in the bill of materials for a tyre – have quietened down considerably. All-in-all, it’s looking good for Bridgestone in 2012, I would say.

Thailand RSS3 daily rubber prices

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