Macroeconomic and market context

THE INTERNATIONAL ECONOMY

The global GDP rose by 2.5% in 2013, at virtually the same rate as in 2012 (+2.6%) but with higer volatility in emerging countries.

Cyclical recovery in the eurozone seems to have gotten underway, although at a moderate pace. The latest macroeconomic figures released in the United States confirm the steady improvement in the U.S. economy that has led the Federal Reserve Bank to reduce its extraordinary measures to support growth. However, these measures negatively impacted emerging countries, with an outflow of investing capital, softening of local currencies and higher inflation. The consequent increase in interest rates has caused economic growth to slow down in those countries.

 

WORLD GDP GROWTH, Annual %

WORLD GDP GROWTH, Annual %

Source: IHS Global Insight, January 2014

Advanced countries grew by 1.3% in 2013, marking a slowdown from 1.4% growth in 2012. European economic activity was conditioned by the austerity programmes adopted in the individual countries that have curbed domestic demand. Nevertheless, improved financial stability, greater consumer and business confidence, and rising foreign demand have sparked a recovery. This has been led by Germany with the steadily increasing contribution made by peripheral countries over the course of the year. However, the overall macroeconomic situation remains fragile, access to credit is still limited, and restructuring of the financial system has yet to be completed. Low inflation and the high rate of unemployment impacted private consumption and economic performance.

GDP growth in North American countries slowed down in 2013 from the previous year, largely due to higher taxes in the United States and, in particular, the automatic spending cuts that came into force on March 1 (the “sequester”). Prolongation of the political debate also caused numerous U.S. federal offices to shut down in October, sapping further resources from the economy. In this context, the United States Federal Reserve Bank maintained a loose monetary policy in support of the economy and employment. In spite of the uncertainty dominating the political arena, GDP growth was sustained in 2H 2013 by consumer spending and residential property investments. This improvement nudged the annual GDP growth rate up to 1.9% and the Federal Reserve Bank to taper off its expansionary monetary policies.

Growth on the Asian economies accelerated slightly in 2013 from the previous year, mainly due to the recovery in Japan, whose economy was stimulated by monetary and budget policies that bolstered consumer confidence and spending. China initiated a new reform phase, and seems to be performing as expected with the planned “soft landing” – development at high rates that are nonetheless lower than the peaks reached during the last several years, with growth of 7.7% in 2013.

Economic activity in Brazil, the biggest economy in Latin America, expanded by 2.3% in 2013, with a slowdown in the second half of the year. Like other emerging country currencies, the real depreciated following the announcement that quantitative easing would be tapered off in the United States, and thus exacerbating inflation. The consequent monetary squeeze operated by Central Bank impacted investment spending in particular. In Argentina, strong economic growth in 1H 2013 was followed by softening in 4Q 2013 as domestic demand slowed down. An acceleration in the depreciation of the peso, and expectations of a further increase in inflation dented consumer confidence on fears of an additional reduction in their purchasing power.

Exchange rates

The tensions that arose on the international markets triggered volatile swings in exchange rates. Expectations that Federal Reserve Bank purchases of U.S. government bonds would be cut back (“tapering”) encouraged a steady outflow of capital from emerging countries, exacerbating the depreciation of their currencies and simultaneously benefiting reserve currencies.

In 2013 the euro strengthened against the dollar, rising from an average level of USD 1.29 (in 2012) to USD 1.33. The euro rose particularly in 4Q 2013, reaching USD 1.36 notwithstanding the 25 basis point cut in the European Central Bank reference rate (to 0.25%) in November.

In Asia, the yen rate was influenced by the expansionary monetary policy undertaken by the Japanese central bank to stimulate sluggish growth and fight deflation.

The average yen-U.S. dollar exchange rate rose from 79.8 in 2012 to 97.6 in 2013, which was equivalent to depreciation of the yen by 18%. With the exception of the brief period of uncertainty triggered by the U.S. Federal Reserve Bank announcement on May 22 that quantitative easing would be tapered off (coinciding with the period when all reserve currencies appreciated), the yen softened steadily over the course of the year.

The appreciation of the Chinese renminbi remained under the prudent control of Chinese monetary authorities, levelling off at an average of 6.3 renminbi to the U.S. dollar in 2013, corresponding to an appreciation of 2.1%.

Latin American currencies depreciated steeply against the U.S. dollar in 2013. They were hit especially hard by the U.S. Federal Reserve Bank announcement that quantitative easing would be tapered off, which triggered a brusque contraction in foreign credit to emerging countries. The Brazilian real fluctuated in a range between 1.95 and over 2.40 BRL/USD in 2013, for an average of 2.16. This represented a depreciation of nearly 10% from 2012 in spite of the rise in the reference rate by the Brazilian central bank (from 7.25% in March 2013 to 10.50% in January 2014). The Argentine peso also fell sharply: the average rate for 2013 – 5.48 pesos to the U.S. dollar – reflects a 17% decrease from 2012, following a 9% fall in 2012. The Venezuelan bolivar was devalued in February 2013, until the official exchange rate rose from 4.3 to 6.3 bolivars per U.S. dollar.

EUR/USD EXCHANGE RATES

EUR/USD EXCHANGE RATES

Source: BCE

AUTOMOTIVE MARKET

Car and Light Vehicle Sales

In 2013 global sales of new vehicles rose by 4%, compared with +5% in 2012 (Source: IHS). The market was boosted especially by sales in China, the United States and the United Kingdom.

The contraction of the automotive market in Europe abated in 2013. It fell by a total of 2% from 2012, but did start growing again in 4Q 2013. Peripheral markets and core markets were both affected by weak demand.

The significant growth in the United Kingdom and the lower growth in Spain and Portugal were unable to offset the fall in sales in Germany, France, Italy and the Netherlands. Although subsidies were introduced in Russia during 2H 2013 to ease access to credit, vehicle registrations fell by an average 6% for the year. This trend was driven mainly by the economic slowdown and termination of government incentives that had sustained registrations in 2012.

Nafta members benefited from a positive macroeconomic situation that supported vehicle registrations.

The United States recovered volumes in 2013 that had been lost after the 2008-2009 financial crisis, and sales of light vehicles rose by 8%, slightly lower than in 2012.

Markets in Asia turned in a mixed performance. In China car registrations jumped by 15%, accelerating during the last months of the year. The market benefited from robust increase in the number of dealers and greater use of financing by consumers. In Japan, car sales dipped slightly in 2013, being negatively impacted by the termination of government eco-incentives in 2012. However, purchases recovered at the end of 2013 in anticipation of higher consumption taxes scheduled to take effect in April 2014.

In Latin America the car market expanded by 1%, being impacted by contraction on the Brazilian market. The end of car purchase incentives, which had sustained demand for the last two years, coupled with the rising cost of consumer credit, negatively impacted registrations, which contracted by 1%. The car market expanded robustly instead in Argentina, with sales up by more than 10%. Consumers there purchased cars as a “safe haven” in the face of high inflation.

Commercial Vehicle Sales

The commercial vehicle market stabilised in 2013 after global demand fell by 7% in 2012. Sales rose in emerging markets, while mature markets returned to growth only in the closing months of the year. China and South America distinguished themselves as the most dynamic markets, posting double-digit growth in 2013.

Commercial vehicle sales in Western Europe rose slightly (+1%), mainly due to improvement during 4Q 2013. New registrations of heavy trucks rose by +6% from 2012, with a fast acceleration during the last months of the year following introduction of the Euro VI regulations (in force from January 2014). Just as noted in the car market, the United Kingdom and Spain contributed the most to growth, while the German and French markets contracted slightly. The Italian market remained the weakest of the leading markets, with sales of vehicles having a curb weight of over 3.5 tons falling 8%. In Russia the commercial vehicle market contracted in step with weakening industrial production, combined with the introduction of a tax for the recycling of imported vehicles (which was extended to cover locally made vehicles as well in January 2014).

In the United States the moderate recovery of demand for heavy range vehicles that began in mid- 2012 continued. Vehicle purchases in this market accelerated in 2H 2013 in response to expansion of the construction industry. The heavy vehicle segment grew by 1% from the previous year, and +10% in the light range vehicle segment.

In Asia, China recovered its status as the main force driving the growth on the commercial vehicle market after contracting in 2012. The demand for commercial vehicles leapt at a double-digit rate in 2013, being driven by the implementation of emissions regulations at the beginning of 2014. On the contrary, the Japanese heavy vehicle market slowed down after posting a 16% increase in 2012, remaining stable at the levels reached the previous year.

In Latin America commercial vehicle sales grew robustly in 2013. The market resumed expanding in Brazil after contracting sharply in 2012, when the introduction of emissions regulations had moved up sales to 2011. Commercial vehicle sales rose by 15% in 2013, after falling by -20% in the previous year. As in the car market, the Argentine market for commercial vehicles grew at a double- digit rate in 2013, as measured by both sales and production.

TYRE MARKET

Consumer segment

The global consumer tyre market totalled 1.4 billion units in 2013, marking a 3.5% increase after the slight decrease reported a year earlier. Asia Pacific and Latam were the regions that contributed most to growth, while mature countries had more modest growth. The premium market grew at a sustained rate, amounting to 9% globally.

The European tyre market ended 2013 with sales volumes at virtually the same level as the previous year. Both the original equipment segment and the replacement segment began growing in 3Q 2013, being driven by the steady improvement in consumer confidence. The premium market in Europe resumed growing at a rate higher than the market average after a slight downturn in 2012. The Russian consumer original equipment segmentrecorded negative rates as well as the summer replacement segment. This reflected the weak performance of the local economy, which was impacted by lower commodity prices.

In Nafta countries, consumer sales in the original equipment segment tracked the positive performance of vehicle production, growing by +5% in 2013 (+17% in 2012). Net sales in the replacement segment, excluding imports, decreased instead by 1% during the year. The result including imports was an increase of +4%, with growth occurring during the last four months of 2013.

The growth in vehicle output and registrations in China boosted original equipment tyre sales by 17% in 2013. In Japan, after the steep increase in 2012 connected with the increase in car production, original equipment sales decreased by 4%, while they increased by 4% in the replacement segment.

Driven by the strong performance of Brazil and Argentina, the South American tyre market grew in both product segments during 2013.

Tyre sales, Consumer segment2010201120122013
Europe*  Original equipment 13%  3%  -9%  0% 
Replacement 8% 3% -12% 0% 
Nafta  Original equipment 39%  10%  17%  5% 
Replacement 4% -1% -5% -1% 
South America**  Original equipment 13%  2%  0%  6% 
Replacement 11% 7% 1% 9% 
China Original equipment 31%  2%  7%  17% 
Japan Original equipment 20%  -13%  19%  -4% 
Replacement 9% 8% -1% 4% 

* including Turkey, excluding Russia.
** Argentina, Brazil and Venezuela.
Note: data do not include imports, with the exception of South America, where the replacement segment includes imports to Brazil.
Source: Pirelli estimates.

Industrial segment

The global radial truck tyre segment amounted to 140 million units in 2013, up 3% from 2012. This was mainly due to China (the biggest market with about 40% of the global market), Brazil and Europe.

After sales contracted in 2012, the European industrial tyre market (including Turkey) resumed growing in 2013, increasing by 6% in the original equipment segment and 7% in the replacement segment (net of imports).

After three years of expansion, original equipment sales in Nafta countries fell by 4% in 2013 (net of imports), while those in the replacement market rose by +2% after contracting the previous year.

In Asia, the recovery in commercial vehicle production and registrations in 2013 pushed original equipment sales in China up sharply by 17%. The replacement tyre segment turned in a positive performance, with a +3% increase. In Japan, sales to the original equipment segment remained substantially unchanged from the previous year, while the replacement channel, which showed a 6% increase, recovered from the downturn of the previous year.

In South America, the development of commercial vehicles in Brazil and Argentina was reflected by original equipment tyre sales, which rebounded by 34% in 2013 after plunging -29% in the previous year. Sales in the replacement channel also recovered by +10% after falling in 2012.

Tyre sales, Industrial segment2010201120122013
Europe*  Original equipment 57% 32% -8% 6%
Replacement 18% -1% -17% 7%
Nafta  Original equipment 30% 55% 5% -4%
Replacement 18% 35 -11% 2%
South America**  Original equipment 47% 11% -29% 34%
Replacement 23% 2% -4% 10%
China  Original equipment 53% -15% -19% 17%
Replacement 10% 1% -4% 3%
Japan Original equipment 37% -2% 15% 1%
Replacement 14% 7% -4% 6%

Commodities

Moderate global growth in 2013 translated into limited inflation and commodity price increases. The average USD 109/bbl price for Brent crude oil in 2013 was slightly lower from the average of USD 112/bbl in the previous year. While geopolitical tensions in Syria drove up crude oil prices in the first part of 2013, higher oil and gas production in non-OPEC countries, especially the United States, reduced supplier price pressures, contributing to the relatively stable price for Brent crude during the year.

The price of natural rubber (TSR20) was impacted instead by the weakening of demand in Europe and China and increased production. This last factor resulted from the growth in commodity prices between 2005 and 2008 and consequent investments in cultivated areas. The average purchase price of USD 2,518/ton in 2013 was 20% lower than the average price of USD 3,156/ton in 2012.

Hit by weak demand and excess supply, prices for butadiene, which is the principal ingredient used in making synthetic rubber, fell in 2013. Prices fell below euro 1,000/ton (euro 750/ton in August) for the first time since March 2010, and the average purchase price in 2013 was euro 1,108/ton, 37.5% lower than in the previous year.

COMMODITY PRICES

COMMODITY PRICES

COMMODITY PRICES

COMMODITY PRICES

Fonte: IHS Global Insight