Is Japan facing rubber, tyre shortage?

Japanese vehicle makers are set to increase their production output between October 2011 and March 2012 and this is likely to lead to a shortage of synthetic rubber. At roughly the same time Japanese tyre maker Bridgestone notified OEMs that orders for passenger car tyres are likely exceed its domestic production capacity leading concerns that the country could be in line for both a synthetic rubber and a domestic tyre shortage.

According to an official statement Bridgestone released to the Nikkei, the company is expected to face a shortage of an estimated 500,000 tyres this year roughly 5 per cent of domestic OEM orders received.

The regulatory filing went on to explain that Bridgestone’s seven domestic plants making passenger car tyres are “operating around the clock and have no room to raise output.” Brining in tyres is the obvious option, but “procuring tyres from plants overseas appears to be difficult due to strong demand there,” the Nikkei report said.

And this is all set against an increase in global output from the Japanese-based global carmakers. Toyota Motor and seven other major manufacturers of passenger cars projected a 2 per cent year-on-year increase in global output in the six months to end-March 2012, with major hikes planned in Japan platts.com reported.

Bridgestone ‘no plans to increase prices’ further

Market analysts, including a response from Morgan Stanley, added further light to the comments summarising Bridgestone announcement as hinging on two key issues: the fact that it might not be able to keep pace with increasing demand next year and is preparing to increase production by January; and pricing – the company has no plans to increase prices further to counter higher raw material costs. The latter point is perhaps the more surprising of the two as it comes after a long period of price increases from tyre manufacturers across the board who have all responded to sky-high input costs by increasing prices.

Morgan Stanley’s concurred with this analysis and even put it a grade stronger. These comments “appear in sharp contradiction” the bankers said in an investor’s note published Monday 5 September, adding: “high demand and low capacity are usually the perfect environment to raise tyre prices – this is what the tyre industry has consistently done in the last 12 months.”

Source: Morgan Stanley

Global role reversal possible with emerging markets still growing strong

Their view, based on comments from peers in the tyre industry, is that it is becoming clear that volumes are softening in the developed markets (for example the US, but this trend can also be seen in the UK). “Hence one potential explanation for the slightly odd statement above may simply be that we have a combination of growing capacity, softening demand and lower raw material costs,” the analysts surmised, with a warning: “If companies shift towards market share gain rather than price discipline we could see considerable more pricing pressure in 2012.”

The theory is that there global market may witness what Morgan Stanley referred to as a “huge decoupling” in its midst with the US being the region described as most at risk, followed by Europe. “We think tyre replacement markets in Latin America and China will surprise the bears as the key structural leading indicators (car parc, number of cars on the road) have been increasing at a much higher pace than in develop market (see chart).”

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• Japanese tyre makers avoid share price carnage

• JATMA report shows marked Japanese recovery in 2010

• Analysts raise Yokohama estimates