As we noted in the February Commercial Tire Dealer section, the off-the-road tire industry in North America is extremely dependent on the market abroad. Because OTR tires are so highly specialized, and only a handful of manufacturers have the resources to build the largest tires on the planet, this global industry must be analyzed using the chaos theory — “When complex systems were entirely dependent on initial conditions, such as the weather, even the smallest changes could yield dramatically different results in the end.”
What happens in one heavy equipment market has an affect on all other markets in the world. By looking at the retail statistics for Caterpillar dealers, as an example, sales for its equipment in the rest of the world were booming in 2007, but losses in North America were enough to drag down the entire global figures.
Likewise, the respectable offshore gains in the first half of 2008 were brought down by this continent to the degree that the worldwide figures were close to break even. And when the North American demand started shooting up like a rocket in June of last year, it brought the rest of the world with it.
It’s a little scary to think that one heavy equipment market can impact the world like that, but the U.S. and Canada remain two of the largest industrial superpowers on the planet, and according to Caterpillar’s dealer statistics over the past four years, that fact is a long way from changing any time soon.
Another initial condition that impacts the supply of OTR tires is the nature of the markets themselves. Small OTR tires are by far the largest segment, comprising almost 70% of total production. They are primarily used in the construction industry, so the lack of demand in the North American new housing market affects both the original equipment and replacement supply. And unlike large and giant OTR tires where radials have taken over, bias ply tires are still quite popular, especially on graders and small loaders. This means that production in emerging markets can satisfy more demand in those regions because the technology for building bias ply tires is more accessible and has been around for decades.
And while this market is not immune to shortages or supply issues, it can react faster because the tires require less time and materials to build and cure.
Large OTR tires used in the aggregate industry represent the next largest segment of the OTR tire industry at just over 10% of production. This market is basically divided into two areas (haulage and loaders) and is dominated by one size, the 27.00R49. Once again, the North American housing market plays a major role in dictating demand as does the road construction industry.
The on-going infrastructure projects in China represent another initial condition that impacts the global OTR tire market and contributes to the chaotic supply and demand cycle. It takes a lot of aggregate to build roads, bridges and other public works projects, so the continued modernization of countries like China, India and Brazil puts additional stress on the already strained market.
And unlike small OTR tires where bias ply construction still plays a significant role, most of these tires are radial, so the number of manufacturers with the technology to build them is smaller by comparison.
If one desires a true picture of chaos in the OTR tire industry, all one has to do is take a look at the giant tire market, which is the smallest of the three segments with less than 10% of production.
The mining industry itself is another prime example of chaos theory, so commodity prices have a direct effect on demand for giant haulage tires. With gold prices at an all-time high, gold producers cannot get the materials out of the ground fast enough. This requires mammoth haul trucks with equally mammoth tires, in particular those with 57- and 63-inch bead diameters. The increased demand in this segment of the mining industry has definitely impacted the global supply to some degree.
Coal is another commodity that depends on giant OTR tires and therefore determines the worldwide availability. And while the floods in Australia that have all but shut down coal production may provide some temporary relief for giant tire demand, the countries that are dependant on Australian coal (i.e. China and Japan) will have to get it from somewhere else so that will probably result in more production from other coal producing regions which puts additional strain on the system in those areas.
And it remains to be seen how the demands on OTR tires for rebuilding the earthquake and tsunami-ravaged areas in Japan will affect the global OTR market.
But the true initial condition that defines chaos in the giant OTR tire market is the manufacturing process. These tires are almost exclusively produced with radial construction and there are literally a handful of plants in the world that can produce them. In fact, giant OTR tires are one of the few remaining products that are actually made in the U.S.A. and exported to the rest of the world. And if the number of worldwide plants with the technology to build these tires is small, then the number of manufacturers is even smaller.
Then there is the time factor to build and cure them. It takes more than a day to build one giant OTR tire and cure it in a press. The molds can take years to produce and there are only a few companies in the world with the technology or expertise to build them.
All of the giant OTR tire manufacturers embarked on major expansion projects a few years ago when the shortage reached critical stages, and while the cancelled orders associated with the global downturn gave them an opportunity to build inventories and production capacity, it still wasn’t enough to keep up with the current global demand now that the economy has turned around.
Another factor that impacts the production of giant OTR tires (and all OTR tires for that matter) is the world’s supply of natural rubber. Almost 90% of natural rubber comes from Southeast Asia where torrential rains and the normal reduction in output associated with wintering have diminished global inventories to less than 70 days. OTR tires are incredibly dependent on the cut and chip resistance that natural rubber provides, so any drastic changes in supply will surely have an impact on production. And while no one wants to accept or understand the rash of recent price increases, the cost of natural rubber has more than tripled in the past two years which is difficult to absorb when you’re talking about the thousands of pounds that are used in a giant OTR tire. If the OTR industry thinks the current fill rates are low, then start praying that weather conditions improve in the natural rubber producing countries or the world may experience a shortage of epic proportion that will cripple the global economy.
It won’t take much to throw the OTR tire market into total chaos. The worldwide manufacturing system is extremely sensitive and totally dependent on initial conditions like the supply of natural rubber or the sales of new heavy equipment. And since the market demand on the replacement side is equally sensitive, even the slightest shifts at the equipment, construction, aggregate or mining levels can have a dramatic impact on the global supply of OTR tires.
Kevin Rohlwing, senior vice president of training for the Tire Industry Association, can be reached at [email protected]