Kicking the tires of our weak tire industry: Annual urban inflation jumped31.9% y-o-y in February, up from 25.8% the month before. And if you’ve gone to get a tire change recently, you may have noticed that tires have not been immune to the jump in prices, with average prices for some tires rising 300% y-o-y, industry insiders tell Enterprise. This mostly comes off the back of a tire shortage resulting from dwindling FX reserves and import restrictions — unsurprising, as Egypt imports 100% of its Passenger Car Radial (PCR) tires.

But the problems of the industry go beyond imports: The shortage has been compounded by a range of underlying factors beyond the immediate impact of inflation and the FX shortage. These include an increase in logistical costs, the closure of key component manufacturing firms, limited know-how and labor shortages.

A fledgling domestic industry:Egypt consumed around 10 mn tires in FY2022, of which only 1.5 mn (or 15%) were produced domestically, with the rest of the supply coming from imports, head of the Arab Federation of Tire and Rubber Industries, Tarek Ahmed tells Enterprise, citing data from the Customs Authority. Egypt only produces truck tires and two & three-wheelers, so almost our entire supply of passenger car tires came from abroad, he noted. On top of that, Egypt exported 680k tires that year, or 45% of all domestically-produced truck tires, with locally produced tires making up the overall tire market, Ahmed noted.

This was not helped by Trenco’s closure in 2022: Domestic tire manufacturer Trenco covered 30% of the internal market before it shut down production, Ahmed said. At present, Pirelli and Pyramid Tires stand as the only tire manufacturers in Egypt, covering around 8.2% of domestic demand, he added.

There’s also the ripple effect of component company shutdowns: Tire production was highly impacted by the closure of component manufacturing companies such as Kordsa, which used to provide nylon cords for tires. “We were forced to shut down as supply for tire production dropped and the MENA region’s economy crippled” stated former partner in Kordsa, Hossam Lasheen.

…Made worse by the FX crunch: “Shortages in FX and tires are interrelated, the scarcity of hard currency has a significant impact on tire production,” as it hinders the procurement of essential components required for tire assembly. As a result, the supply chain is disrupted, exacerbating the overall shortage of tires, tire engineering companyBlack Donut’s sales representative, Ahmed Abou El Nasr told us.

Logistics costs are not making it easier to produce the tires we actually make: Logistics costs have been rising, especially as global fuel prices spiked in 2022, Nasr told us.

There’s also the impact of trained labor shortages on product quality: A shortage of trained labor is creating a knowledge gap and posing a significant challenge to our tire market, said Ahmed. The industry requires a workforce with high levels of expertise to produce quality products, and the fact that the average age of workers at Trenco was 55 indicates the need for a younger, more competitive labor force.

Import restrictions are making things worse: The supply of imported tires decreased 20% y-o-y to 8 mn tires in FY2022, on the back of the CBE’Sdecision last year to increase import restrictions by introducing letters of credit (L/Cs) instead of the low-cost documentary collection process, said Ahmed.

Demand remains high:Demand for tires remains untouched by fluctuations in the macroeconomic climate, leaving consumers vulnerable to higher import prices, said Nasr. Prices for most imported tires increased more than 300% y-o-y in FY2022, Ahmed told Enterprise.

The bright side? We have an industry ripe for import substitution, and private and public companies are ready to step in. Several private companies and the Arab Organization for Industrialization (AOI) are eyeing tire production in Egypt, Nasr added. Also, American construction consulting firm Hill International and the AOI have signed a contract to manage a diverse tire factory. Meanwhile, there appears to be moves to incorporate tires as a domestic component in any incentives offered in Egypt’s automotive strategy which aims to encourage local assembly of cars, Nasr Added.

REMEMBER- Reducing imports is fundamental in shoring up FX reserves, and narrowing the current account deficit, which narrowed by 20% to USD 3.2 bn in 1Q2022-23, on the back of higher FDI and a jump in exports and tourism revenues.

NEXT WEEK — We dive deeper into plans to change up the dynamics in the tire industry, courtesy of the private sector and the AOI.

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