European Tiremakers Get Boost From New Winter-Tire Rules
Michelin & Cie. (ML), Continental AG (CON) and other European tiremakers, already steering clear of the region’s debt crisis, got an early Christmas gift this week when Luxembourg made snow tires mandatory on the duchy’s roads.
More good news may be on the way with Poland, Turkey and Belgium also considering requirements that drivers buy tires for snowy roads and the European Union discussing standardized winter-tire rules. The moves would give the industry another hedge against the volatility plaguing carmakers.
“Pricing for the tiremakers is much more favorable” than for auto manufacturers, said Sascha Gommel, an analyst at Commerzbank in Frankfurt.
That has helped boost profits and lift share prices for the industry. Europe’s four biggest tire companies -- Michelin, Continental, Pirelli & C. SpA (PC) and Nokian Renkaat Oyj (NRE1V) -- have all jumped by more than 30 percent this year. Michelin’s 44 percent increase is double the gain of the 14-member Stoxx 600 autos and parts index.
Continental, which returned to Germany’s benchmark DAX index last month, has done even better, surging 66 percent. With that performance, the Hanover, Germany-based manufacturer is valued at 7.8 times estimated 2012 earnings, compared with 4.9 times for Europe’s No.1 carmaker, Volkswagen AG. (VOW)
Nokian Renkaat rose as much as 4.3 percent today, the most in three weeks, and was up 4 percent at 34.45 euros as of 12:48 p.m. in Helsinki trading.
With winter tires costing as much as 25 percent more than summer tires, Europe-wide regulations could net the industry 2 billion euros ($2.6 billion) in additional revenue, according to Lars Holmqvist, a consultant with Kreab Gavin Anderson and the former head of European auto supplier association Clepa.
Even without the boost, replacement tire sales, which account for about 75 percent of the industry’s revenue, are forecast to rise 6 percent in Europe in 2013, bouncing back from a 5.9 percent drop this year, according to Goldman Sachs Group Inc. Car demand, by contrast, is headed for its fifth consecutive annual decline this year and isn’t expected to reach pre-crisis levels until after 2017, IHS Automotive forecasts.
The tiremakers have a key advantage over the car manufacturers in that they can pass on cost increases more easily, said Erich Hauser, a London-based Credit Suisse analyst.
“How much a Golf or Peugeot 208 costs has great visibility, whereas people have very little feel for how the price of a tire changes,” Hauser said. “Ten years ago the tire industry was about a 5 percent margin business while today it’s roughly 10 percent. Renault or Peugeot five years ago was also a 5 percent margin business but today it’s zero percent.”
Such stealth pricing power helped Continental, the second- largest European tiremaker after Michelin, boost second-quarter operating earnings at its tire division to 17.1 percent of sales from 13.5 percent a year ago.
Even as European automakers were discussing factory closures, Continental in August raised its 2012 revenue and profit outlook after second-quarter profit jumped on lower raw material costs. Michelin last month confirmed its 2012 targets and raised a 2015 profit goal by 16 percent to 2.9 billion euros, almost 50 percent more than its 2011 earnings.
Luxembourg slapped a 74-euro penalty on drivers not complying with its snow-tire rule. Polish lawmakers have proposed a 500-zloty ($158) fine for drivers not using winter tires from November through March. Turkey and Belgium are mulling similar laws, and Germany mandated winter tires two years ago.
Winter tires have deeper treads than regular tires for better grip and softer rubber that performs better in cold temperatures but wears more quickly in the summer months. In Sweden, which started requiring winter tires in 1999, the tread must be at least 3 millimeters deep.
The European Commission is considering a standard definition for winter tires throughout the region. The rules could be finalized next year, said Fazilet Cinaralp, secretary general of the European Tyre and Rubber Manufacturers’ Association in Brussels.
“As soon as the definition has been clarified, we’d like to see a broader mandate on winter tires fairly quickly,” Cinaralp said. “Countries such as Belgium, Denmark, France, Netherlands, Poland and the U.K. should have mandatory winter tires.”
Winter-tire legislation can mean “double-digit” percentage growth in sales, said Frank Schuhardt, chief financial officer at Delticom AG (DEX), Europe’s biggest tire dealer, based in the German city of Hannover.
Mother Nature may also help. The Finnish Meteorological Institute says Europe has a strong chance of colder-than-normal weather this year. With a snowy winter, Europe’s tire market may grow 10 percent, said Kim Gran, chief executive officer at Finland’s Nokian Renkaat, the biggest winter tire brand in Russia and the Nordic region.
With Europe’s car market this year expected to hit fall to its lowest level since 1995, growth like that remains a distant dream for most of the region’s carmakers.
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