Hankook Plans to Raise Tire Prices 5% as Rubber Costs Rise

Hankook Tire Co. (000240), South Korea’s largest producer, plans to raise prices as much as 5 percent this year to reflect the higher cost of rubber, President Cho Hyun Bum said.

The increase may help the company post better earnings than it had previously expected, Cho, who’s also chief strategy financial officer at the Seoul-based tiremaker, said in an interview yesterday. 

Hankook, the biggest seller of passenger-vehicle tires in China, is joining companies such as Aeolus Tyre Co. (600469) in raising prices after the cost of material climbed 27 percent in 2012. Profit at the company will probably rise 78 percent to 631.6 billion won ($561 million), according to the average of 26 analyst estimates compiled by Bloomberg.

“This shows Hankook’s confidence and its pricing power has risen,” said Shin Chung Kwan, an analyst at KB Investment & Securities Co. (HISZ)

Hankook rose 4.2 percent, its biggest gain in more than a month, to close at 43,750 won in Seoul trading today. That compares with a 0.7 percent decline in the benchmark Kospi stock index. The tiremaker, whose customers include Bayerische Motoren Werke AG (BMW) and Hyundai Motor Co. (005380), has fallen 3.3 percent this year.

Prices Will Fall

Goodyear Tire & Rubber Co. (GT) will increase prices of consumer tires by as much as 6 percent next month, Tire Review reported on its website.

Passenger tire prices rose an average of 15 percent last year, according to Modern Tire Dealer, a U.S. trade publication. Raw material prices climbed 27 percent per tire, the publication said, citing Saul Ludwig, a managing director at Northcoast Research Holdings LLC.

Hankook increased tire prices by about 12.5 percent last year, according to KB Investment’s Shin. While rubber prices have continued to climb on a seasonal shortage of supply, costs will eventually fall, he said.

Average prices of so-called natural rubber is expected to fall to $4 a kilogram this year and 2013, compared with $4.60 last year, according to Goldman Sachs Group Inc. (GS) estimates in January.

No.1 in China

Separately, Cho said he expects Hankook to keep its lead in China, which generated about 14 percent of the company’s revenue last year. It currently has two plants in China that produce 30 million units annually between them. More than two-thirds of the tires produced in China are sold in the local market, said Cho.

Hankook Tire entered the Chinese market in 1996 and built production facilities in Jiangsu and Jiaxing three years later.

By 2003, Hankook became the country’s largest producer and has held more than 20 percent of the passenger market since 2010, the company said.

“We expect the company’s growth in China to continue well above the forecast market average this year,” Cho said, even as rising competition from other global players pose as a challenge. “This year, the plan is to maintain our market share,” he said.

Tire output in China may rise 6 percent this year, matching the pace of 2011, as domestic demand remains “robust,” Fan Rende, head of the China Rubber Industry Association, said in an interview in Qingdao on March 20.

BMW Supplier

Hankook Tire has been supplying tires to BMW since July from a plant in Hungary. So far, the company supplies tires to the Mini, and 1 series models. Hankook and BMW have “almost finalized” terms for a deal to supply tires for the 3 series, according to Cho, increasing the likelihood of Hankook becoming the official tire supplier at all platforms in the German automaker.

“An automaker does not select a tire manufacturer to just get supply for smaller cars,” Cho said. “ They plan to get tires across the board, so eventually we expect to become their official supplier that supplies the whole model class,” he said.

The goal is to become a key supplier taking up 30 percent of total supply for one of the top 3 luxury automakers of BMW, Daimler AG (DAI) and Volkswagen AG (VOW)’s Audi unit, namely, Cho said. After the deal with BMW, other premium brands have shown interest in Hankook and negotiations are under way with some of those players, he said, without elaborating.