By David Bailey and Bernie Woodall
DETROIT, Sept 14 (Reuters) – A developing U.S.-China trade dispute will drive tire prices higher for American consumers and threatens to complicate business for U.S. auto companies in the booming Chinese market if unresolved, analysts said.
The Obama administration said on Friday it would adopt steep tariffs on tire imports from China later in September, a move a tire distributor said would have the effect of raising the price of low-cost tires to consumers almost immediately.
China denounced the U.S. decision as trade protectionism and launched an anti-dumping investigation into imports of U.S. auto parts and other items, including chicken products. [ID:nSP459289]
A U.S. trade official said the United States was confident the curbs on tire imports were consistent with World Trade Organization rules and were only imposed after efforts to reach an agreement with China had failed. [ID:nWAT013737]
The tariff increase was supported by the United Steelworkers union, which represents workers at U.S. tire plants.
Goodyear Tire & Rubber Co professed neutrality, but could benefit regardless from the price increases. A Cooper Tire & Rubber Co representative could not be reached immediately for comment, but KeyBanc Capital Markets analyst Saul Ludwig said the tire maker opposed the tariffs.
“The potential pluses should trump any negatives,” Ludwig said in a note to clients. “We have been very impressed with Cooper’s plan to lower costs and recapture share and drive earnings higher, so any reduction in China exports provides Cooper a terrific opportunity to gain share.”
The tariff sent the shares of U.S. tire makers higher as investors reacted to an expected increase in profit margins. But longer term, analysts cautioned the action could complicate international production efforts.
Goodyear shares closed 3 percent higher and Cooper Tire shares ended the day up 7 percent after jumping as much as 13 percent after the steep additional duties were announced.
“It will be bad news for consumers and, ultimately, it probably hurts the people they are trying to protect,” Morningstar analyst Dave Whiston said.
Whiston said he would not expect an impact on U.S. auto manufacturers such as General Motors Co [GM.UL] and Ford Motor Co unless the situation worsened significantly.
The tire issue joins a line of U.S.-China disputes that have included steel pipes, steelmaking materials and other products. [ID:N14321994] [ID:nN14512846]
The disputes threaten to draw in U.S. auto companies, most of which have joint ventures in China that produce car parts and full vehicles for the fast-growing Chinese market. In time, China car exports are expected to the U.S. market as well.
The China market is critical for U.S. automakers looking to target growing regions, while restructuring operations in high profit mature markets in North America and Western Europe.
China’s share of the U.S. tire market grew to 17 percent in 2008 from 4.7 percent in 2004 as the tire makers increasingly looked to lower-cost regions to produce low-priced tires.
In the end, tire price increases could benefit manufacturers, but leave them wondering where to distribute tires made at factories they have in China.
“It’s going to end up costing the (U.S.) consumer,” said Earl Buono, co-owner of Stoney Hollow Tire, an independent tire distributorship based in Martins Ferry, Ohio.
Low-end tires made in China sell for about $50 to $60 in U.S. stores and prices will rise to $85 to $90, he said.
A U.S.-made “mid-range” tire of better quality will end up costing about the same as the low-end China import, he said.
Goodyear said the net impact is unclear. Less than 2 percent of the more than 71 million tires it sold in North America last year came from China, Goodyear said.
JP Morgan analyst Himanshu Patel said the additional duties on Chinese tires would be a largely positive development for Cooper and neutral to modestly positive for Goodyear.
Standard & Poor’s equity analyst Efraim Levy said Cooper’s tire prices would rise, but other efforts could be hindered.
“Cooper Tire’s profit improvement strategy has been counting increasingly on its China made tire imports to lower its costs and increase its competitiveness,” Levy said.
“These tariff could hinder or derail (Cooper’s) efforts, but we keep our buy opinion on valuation.”
The new duties of 35 percent on Chinese tire imports will take effect Sept. 26 and add to an existing 4 percent duty.
The duties would fall to 30 percent in the second year and to 25 percent in the third year. The new duties are lower than the U.S. International Trade Commission recommended.
Cooper shares were up $1.03 at $15.60 on the New York Stock Exchange at the close of trading, while Goodyear shares were up 51 cents at $17.78.

Source: Reuters

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