Tyre Market in Line for a Sell-in Bounce

Market analysts are predicting tyre industry sell-in sales volumes will improve sharply in the second quarter of 2009. Morgan Stanley experts explained in an investor’s note issued on 9 April that production cuts of between 40 and 60 per cent in OE and 10 to 40 per cent in replacement tyre production in January and February were “far more draconian than anticipated,” but nonetheless “deliberate and forthright” action. “We estimate Michelin’s sell-in tyre volume through the first two months of the year has declined approximately 20 per cent, assuming constant market share. Simply put, we believe this pace of volume decline is not sustainable,” the analysts commented.

The theory is that dealers that de-stocked tyres rather than purchase additional products at the beginning of 2009 are currently, or will soon, run low on inventory and therefore tyre factories must start running again. “We forecast Michelin tyre volume down 6.6 per cent for the full year, implying rest-of-year volumes down 3.9 per cent. At a minimum, we expect the extraordinary pace of volume decline to diminish sharply and soon.”

This thesis echoes the sentiment of Pirelli Tyre CEO Dr Francesco Gori who, during the launch of the P7 Cinturato, told Tyres & Accessories he hoped that the tyre market had hit the bottom of its recent trough and that the worst of the recent sales downturn is over. For its part Morgan Stanley envisages the odd monthly year-on-year increase in tyre volume during 2009, but the bank’s analysts remain convinced that tyre pricing will inevitably be cut from 2008’s peaks.

What is interesting here is that, unusually for analysts that seem to spend most of their time cheering on “price discipline” – or rather price increases to you and me, Morgan Stanley lends its support to lubricating stagnant sales with some forms of price cuts. Referring specifically to the case of Michelin, the investors’ note commented: “Price declines are a natural and even healthy fact of the industry. We believe our assumption of a 4 per cent price decline and 0.5 per cent mix deterioration in 2009 is gentle. We do not base our assumptions on a ‘price war’, but merely have taken the view that Michelin’s pricing policy, while remaining disciplined, gives back some of the benefits of an unprecedented collapse in raw-materials.”