Nexen will boost prices as cost of rubber slumps

Nexen Tire, which has seen expanded revenue each year since 2000, plans to further increase its profitability by raising prices as global rubber prices plummet.

The nation’s third-biggest tire producer outperformed larger rivals in the latest reporting period, with second-quarter net income rising 43 percent compared with a 25 percent drop for Hankook Tire and 2 percent gain at Kumho Tire.

Growth was driven by lower raw material costs and increased sales of more-expensive ultra-high performance tires for sport utility vehicles, said Lee Jang Hwan, a director at Nexen’s global marketing division.

“Our tire prices will continue to increase slightly regardless of the falling rubber cost,” Lee said in Seoul. “The company will continue to show strong profits in the third and fourth quarter.”

While Nexen’s Korean clients Hyundai Motor and Kia Motors have shifted manufacturing overseas to escape a stronger won that has hurt exports, the tire maker is focusing on higher margin products and cutting costs through automation. About 75 percent of Nexen tires are produced in its home market, which accounted for 27 percent of revenue last year.

“A stronger won undoubtedly has an adverse impact on our business,” said Lee, 51. The company offset this by boosting output at a new factory in Changnyeong county that’s more automated than its other plants in Korea, he said.

It plans to produce 21 million units at the 1.5 trillion won ($1.4 billion) factory when the final phase is completed in 2018, which will represent about 35 percent of Nexen’s estimated output, according to data from the company.

Nexen produced Korea’s first vehicle tire in 1956, the company says on its website.

“Tire makers don’t necessarily have to lower prices because the cost of making a tire falls,” said Shin Chung Kwan, an analyst at KB Investment & Securities in Seoul. “Consumers usually buy tires out of need and safety concerns, not because a product is cheaper.”

Rubber futures in Tokyo have plunged more than 30 percent this year through yesterday on weakening demand in China, the biggest consumer, and Europe. Net income at Nexen, whose clients include Volkswagen and Fiat, will probably rise 11 percent to 136 billion won this year, according to the average of 17 analyst estimates.

The company, which changed its name from Woosung Tire in 2000, has released 11 new products since 2013, including six models for SUVs and two for winter use.

Bloomberg