Russia's tyre market lays some rubber

By bne IntelliNews August 13, 2012

Natasha Doff in Moscow -

In a country where the ground is frozen solid for a good five months of the year and potholed roads are the norm, a good set of wheels in Russia is invaluable. This is good news for tyre producers, which over the past decade have been quietly reaping the rewards of a sector growing at around 6.4% a year, and have been joined by foreign manufacturers looking to take advantage of Russia's booming car industry.

Last year some 55.5m tyres were sold in the country as new car sales soared close to pre-crisis levels, securing Russia's place as Europe's second biggest car market, according to a recent report by Moscow-based investment bank Aton.

As well as piggy-backing on growth in new car sales, the tyre market also benefits from the harsh Russian climate. Since new cars come equipped with only summer tyres, buyers inevitably have to splash out on a set of winter tyres, at prices around 15-30% higher than summer tyres.

Currently the market is dominated by Russian players, with the biggest, Nizhnekamshina, holding a share of some 26% by production levels, closely followed by Cordiant (formerly Sibur-Russian Tyres.) A third major player, Amtel, was taken over by Sibur, and later Italy's Pirelli, after it ran into debts while trying to modernise its two plants.

Competition is growing, however, from foreign players, attracted by growth potential in the country's unsaturated car market. Currently, there are only 257 cars for every 1,000 people in the country, compared with 540 in the EU.

In the past several years, a raft of foreign companies have been setting up production facilities in Russia, focusing mainly on the premium segment, where Russian firms lack expertise. Italy's Pirelli bought two Russian tyre plants late last year in a joint venture with Russian Technologies for some €222m.

Carlo Costa, Pirelli's CEO for Russia, the former Soviet Union and Scandinavia, tells bne that the joint venture is aiming for sales of €250m this year, most of which will be reinvested in expanding capacity at the plants to 10.5m tyres from the current 8.5m by 2015.

The biggest foreign player on the market is Finland's Nokian Renkaat, which turned out some 11m tyres at its production plant in Vsevolzhsk near St Petersburg in 2011, according to Aton Capital, some 4m more than was produced at the firm's main plant in Finland.

Aton analyst Mikhail Pak says foreign players have an advantage over domestic producers since the premium tyre segment is growing faster than the low-end segment, largely because Russians are investing in more expensive cars. "People are starting to trade up," Pak says. "The average car price in Russia has increased significantly over the past five years and generally, if you buy a more expensive car, you will be looking to put decent tyres on it."

Companies working in the budget segment are also likely to be hit by an influx of imports, especially from China, when import duties on passenger tyres drop from 20% to 10% in the next five years due to Russia's entry to the World Trade Organization. Pak says this is unlikely to affect the premium segment, since most of the foreign players involved are already setting up production in the country.

For them, the biggest risk is a slowdown in global economic growth. Russia's car market was hit hard by the 2008-09 crisis, with sales plummeting and many domestic producers having to be propped up by government support programs to prevent them from going bust.

Tyre producers, however, have an advantage over the sector whose growth they siphon: unlike cars, tyres constantly need to be replaced meaning they are therefore far less vulnerable to economic downturns. While car sales slumped almost by half between 2008 and 2009, tyre sales dropped by comparatively less painful 36%. Someone then, at least, is benefiting from the icy roads and potholes.

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