Tire Stocks Expected to See Sharp Decline in Q2 Sales

[Asia Economy Reporter Song Hwajeong] The tire sector is expected to continue its sluggish performance into the second quarter. Sales are anticipated to have sharply declined in Q2 due to weak demand.

According to Shinhan Financial Investment on the 11th, demand for new car tires (OE), which experienced a production cliff, decreased by 99% in North America and 95% in Europe in April. Although new car demand is estimated to have partially recovered from June with the U.S. up by -29% and Europe by -35%, normalization is expected only in the third quarter. Replacement tire (RE) demand also recorded declines of -47% in North America and -53% in Europe in April, with a slow recovery to -29% and -32% respectively in May.

The only positive factor for the tire sector is the decline in costs, but its effect is expected to be more limited than in the past. Researcher Jeong Yongjin from Shinhan Financial Investment explained, "Prices of key raw materials have fallen due to the drop in oil prices and reduced upstream demand," adding, "The price of natural rubber averaged $1,121 per ton in Q2, down $220 from Q1, and synthetic rubber prices also fell by $279 to an average of $1,174 per ton compared to Q1." Jeong further noted, "Considering a 1-2 month lag effect in raw material input, profitability improvement from lower-cost raw materials is expected from the end of Q2, but the impact will be more limited than before," citing that "industry product inventories have risen to 65-90 days (compared to 50-70 days in 2019), leading to a decline in production operating rates and a lack of aggressive procurement of low-cost raw materials."

Poor Q2 earnings appear inevitable. Hankook Tire's operating profit for Q2 is expected to be 40.6 billion KRW, down 61.6% year-on-year. Nexen Tire is projected to report an operating loss of 5.4 billion KRW, and Kumho Tire is also expected to return to an operating loss of 28.8 billion KRW compared to the previous year. Researcher Jeong analyzed, "Hankook Tire started proactive cost-cutting from Q1, and June sales were better than expected, but June may reflect temporary inventory buildup due to lockdown easing, so sales trends in July and August need to be monitored," adding, "Nexen Tire was heavily affected by weakness in Europe, with OE and RE demand estimated to have decreased by 50% and 30% respectively in Q2."

Signs of recovery are expected in the third and fourth quarters. Researcher Jeong said, "Although the recovery pace in Q2 is slow, the direction of recovery in Q3 and Q4 is clear," and added, "The gap between automobile demand and tire demand could manifest as pent-up demand in the future, making a low-price buying strategy effective." He also noted, "However, attention should be paid to the first results of the U.S. anti-dumping investigation on Korean tires expected in July."