Declining Material Costs may Harm Industry, Say S&P

According to a new report released by Standard & Poor’s, global tyre manufacturers may actually feel more pressure on margins and cash flow as the prices of raw materials decline. The financial and investment specialist added that the industry could suffer if manufacturers take lower costs as a signal to reduce prices in order to gain market share. The reduced income and cash flow from such a price war would in all likelihood more than cancel out the benefits of lower material costs.

“This is because pricing discipline in the industry may fade if tyre 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.”

Long-term industry analyses conducted by Standard & Poor’s show that tyre makers have enjoyed expanding margins during the five years to 2006 despite the rising cost of materials. If comparing the price of natural rubber over this period with the average EBITDA margin achieved by nine sampled companies, the industry expanded overall margins from approximately 10 per cent in 2001 to around 14 per cent in 2005. This increase was achieved in spite of increased natural rubber priced during the period.

The latest Standard & Poor’s report, titled “Peer Comparison: Global Tire Makers May Face Pressure When Raw-Material Prices Decline” examines five tyre manufacturers, who together hold about two-thirds of the global market – Bridgestone, Michelin, Goodyear, Continental and Cooper. It reveals that three of this group achieved tyre related EBITDA margins that compare favourably with the industry average of 10 to 12 per cent over the past five years; Bridgestone 11 to 12 per cent, Continental 13 – 20 per cent, and Michelin 13 to 14 per cent. Goodyear’s EBITDA margin was 6 to 9 per cent and Cooper’s 5 to12 per cent during the same period of time.