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Will inflation make Chinese tires more competitive?

Inflation is in everyone's head nowadays. Not only you can see it in the official data, but also you can see it in real life. In the latest October data, China's CPI is 1.5% while PPI surged 13.5%. US's CPI is 6.2% and PPI is 8.6% in the same month.

The main driver for the increase in PPI is the prices of raw materials. The prices of natural rubber, synthetic rubber, and carbon black have increased by 16.17%, 27.64%, and 65.88% respectively. Carbon black has reached $9000 RMB per ton in China. Even the material costs of wheels have increased by 50% and hence the prices of each wheel, no matter the size, have increased by $100 RMB. Even lubricants have seen prices increase by 15%. Since the beginning of 2021, there are over 250 price increase notices within China from all manufacturers. Some manufacturers have increased prices 3 or 4 times this year already.

However, the trend of increase in commodity prices is stabilized since November. There are 2 reasons: 1) Chinese government has strong actions again financial trading in the commodity market and the US starts tapering this month which make the value of US dollars doing up. Both have stable effects on prices and we can see that oil price has been settled at around $80 US dollars and rubber price is back to a normal level of 1.9 dollars per kg.

However, I don't think inflation will stop in developed countries and that is the divergence between US and China. From the CPI and PPI data, one can see that the US has been better in passing the cost to the end consumers, while China is not. One of the main reasons is China has been deleveraging since the middle of 2020 while the US has just started the tapering this month, which will drive up the inflation in the west.

We can see that in China's credit impulse number, which has been decreasing since last year. It means the generation of new credit has been slowed down which implies the economic activities are slowing. It is harder for manufacturers to pass the cost to the end consumers. However, we see that the west may start to change from commodity inflation to structural inflation driven by the increase in workers' income and housing prices.

The trend for the first half of 2022 will be STAGFLATION where China will have the STAG while the west will have the FLATION.

So tire traders can take advantage of this situation and capture more benefits and serve their customers better by sourcing better value products to fight inflation.

1) Ocean shipping rates are falling. The cost to ship a container across the Pacific fell by more than one-quarter last week, signaling that demand is finally easing. Although the ports are still jammed, it is mainly due to labor and truck driver issues.

2) Trade situation between US and China may get better. As U.S. Treasury Secretary Janet Yellen has said, "We want to see China meet the commitments they made under Phase 1 of the trade deal, and perhaps eventually lowering some tariffs in a reciprocal way could be a desirable outcome." She is also asked if tariffs imposed on Chinese goods could help ease inflationary pressures, Yellen said that was generally the case. So we expect and hope the trade tension between the US and China will ease in 2022.

3) Chinese manufacturers have huge production capacities in Thailand or Vietnam, which are opened up after covid and they can provide low-cost alternatives too.

4) Also because of the slow down within China the sales of commercial trucks have been decreasing and the production capacities of full steel TBR are only running at around 60%. It makes Chinese manufacturers have more incentives to serve overseas customers, especially on TBR where Chinese products are extremely competitive.

So tire traders are making plans for 2022, it will be good for you to talk to more suppliers and find the best deals. If you need any help, feel free to reach out to us CITEXPO and we also have a website that you can connect to trusted and certified Chinese tire and wheel manufacturers.

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