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Michelin Points to 'Steep Slowdown' in U.S. Replacement Market

Posted on August 5, 2019

Michelin called the first six months of 2019 “a more difficult than expected environment.” Sales were up compared to the first half of 2018, at almost 11.8 billion euros compared to 10.6 billion euros; while net income was down — 844 million euros compared to 917 million euros a year ago.

Michelin’s income-to-sales ratio was 7.1% for the first half.

Florent Menegaux, Michelin’s CEO, said: “In highly volatile markets, the Group demonstrated its ability to protect its margins by tight price steering, and by rigorously implementing its competitiveness plan. It also benefited from strong contribution from its recent acquisitions. In this persistently uncertain business environment, the Group pursues its competitiveness initiatives, its firm pricing policy in order to maintain its leadership in its tire businesses, and to continue the deployment of its growth strategy.”

Outlook for the rest of 2019

Michelin expects a mixed bag for the remainder of the year.

“In 2019, the passenger car and light truck tire markets are expected to decline by 1%, as the modest 1% growth in the replacement segment fails to offset the steep 4.4% contraction in the original equipment segment.

“The truck tire markets are expected to decline more quickly in the second half, to end the year down 2%. Mining and aircraft tire markets should continue to expand, offsetting the steep drop in agricultural tire markets and in original equipment demand in construction tire markets.

“The full-year impact of raw materials costs and customs duties is estimated at around a negative 100 million euros, as forecast.”

‘Steep slowdown in the U.S.’

Compared to last year, Michelin says the OE passenger and light truck tire market was down in every region of the world for the first half of 2019. Africa, India and the Middle East suffered the biggest losses — with tire units down 15%. Globally, OE was down 7%. Combined, North America and Central America were down 3%.

The replacement market was up 1% globally, supported by 4% growth in North and Central America, a 2% increase in Asia, and a 1% increase in Africa, India and the Middle East. All other regions were either flat or down for the first half.

But Michelin says the replacement picture in North America could be rosier. There was a “steep slowdown in the United States in the second quarter — to a 1% increase from a 8% gain in the first quarter.

"The growth was led by the 10% increase in the ‘non-pool’ market, which is highly volatile at a time when the trade war between the United States and its trading partners is prompting dealers to stock up on entry-level tires. Demand for ‘pool’ market tires was stable over the period, in line with the trend in kilometers traveled.”

Truck tire trends

The global market for truck tires is anything but stable. There are huge swings from one region to the next. Case in point: OE in Central America is down 40% for the first half of 2019. In South America, it’s up 32%. With ups and downs elsewhere, including OE up 9% in North America, the worldwide OE market is up 2% so far this year.

But the replacement truck tire market globally is down 2% for the first six months, and North America has the biggest drop — 10%.

Here’s a look at the numbers in North America:

  • OE: “In a still fast-expanding economy, the North American market rose by 9% in the first half of 2019, reflecting a high basis of comparison in the prior-year period (up 16%). Momentum slowed in the second quarter, however, to 6% from 12% in the first quarter.”
  • Replacement: “The North American market lost a steep 10% overall, with a faster 12% drop in the second quarter. Despite the robust growth in freight demand, Replacement tire markets were held back by the strong expansion in OE demand in the United States, which has lasted for more than a year now; and the massive drawdown of Asian import inventories between late 2018 and early 2019 ahead of the introduction of customs duties in mid-February.”

Farm and OTR tires

The mining tire market is still seeing “robust” demand from copper, iron, coal and other mining companies. Michelin credits its product offering alongside a growing market in line with tire consumption.

But the good news in mining is offset by trouble in agriculture and construction tires, the company said. In the farm segment, OE markets declined in Europe, due to the economic crisis in Turkey, and in South America, following the introduction of new regulatory standards early in 2019. Demand for replacement tires also fell in Turkey.

Replacement tires dropped in North America due to floods and a drop in farm revenue. There was also a more recent drop in replacement farm tires in Italy.

In construction tires, sales rose during the period, “but the segment is showing signs of slowing down after two-and-a-half years of growth and a record high in 2018.”

Related Topics: Florent Menegaux, Michelin, Michelin financials

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