Soaring Oil Prices... Tire Industry Holds On, But Helpless in a Prolonged Crisis

Brent Crude Rises 3.8%, Surpassing $100
Most Tire Raw Materials, Like Synthetic Rubber, Are Petrochemical Products
Raw Materials Account for 50% of Tire Manufacturing Costs
"We Can Endure for Now... But If Prolonged, There Is No Solution"

The domestic tire industry is facing increasing concerns as the upward trend in international oil prices, prompted by the Middle East war, shows no sign of abating. With both raw material costs and maritime freight rates rising, worries are mounting over deteriorating profitability if the situation drags on, leading to predictions that tire product prices will eventually be raised.

According to industry sources on March 18 (local time), international oil prices, which had briefly stabilized, have surged again. The May futures price for Brent crude, the international oil benchmark, closed at $107.38 per barrel, up 3.8% from the previous session. During the day, Brent crude futures even reached a high of $109.95 per barrel.

The April futures price for West Texas Intermediate (WTI) crude oil, the U.S. benchmark, closed at $96.32 per barrel, which was only a 0.1% increase from the previous session, but the overall rising trend persists.

Enduring Q1 with 'Inventory'... But Profitability Faces Direct Hit If Prolonged

The surge in oil prices is heightening the sense of crisis within the tire industry. This is because the tire sector is among the industries most directly affected by rising oil prices. Since key raw materials such as synthetic rubber and carbon black are petrochemical products, an increase in oil prices leads directly to higher production costs. In fact, the price of synthetic rubber is reportedly rising in tandem with the upward trend in oil and naphtha prices.

In particular, an analysis of the cost structure shows that rising oil prices are critical for the tire industry, as raw materials account for about 50% of tire manufacturing costs. As a result, companies such as Hankook Tire, Kumho Tire, and Nexen Tire are closely monitoring the increase in oil prices caused by the prolonged Middle East conflict.

The tire industry believes that it can withstand the impact through raw material inventories up to the first quarter, but if oil prices continue to rise, a decline in profitability will be inevitable. An industry official stated, "While each company has a different level of inventory, it is likely that the impact of rising oil prices can be avoided at least until the first quarter of this year."

Rising Freight Rates Add to the Woes... Ultimately Considering Product Price Hikes

The problem is that the outlook points to a prolonged period of high oil prices. The British think tank Oxford Economics has suggested a scenario in which, if the Middle East war continues, the two-month average price of international crude oil could rise to $140 per barrel. This would represent a 40% increase over current oil prices.

If this scenario becomes reality, the tire industry is likely to suffer a direct blow to profitability. Moreover, maritime freight rates are also rising due to the geopolitical risks stemming from the Middle East conflict, further compounding the burden. Back in 2022, the combination of higher oil prices and freight rates caused by the Russia-Ukraine war led the tire industry to experience an 80% plunge in operating profits at one point. Ultimately, this resulted in increased tire prices.

An industry official commented, "Since we have long-term contracts with shipping companies, short-term spikes in freight rates are not a major issue. However, if this situation drags on like the Russia-Ukraine conflict, there is no clear way to respond. We are trying to increase the proportion of high value-added product sales as a strategy, but in the end, raising product prices is the only realistic response."

This content was produced with the assistance of AI translation services.