Tire makers worldwide are citing rising raw material costs as the driver of their price increases. Goodyear Tire & Rubber Co. painted a picture of just how extreme the increases have been so far — using words like “volatile” and “unpredictable."
Richard Kramer, chairman and CEO, pointed to “significant volatility in our key commodity costs, including natural rubber prices” during a call with investors Feb. 8.
“Since our last earnings call there’s been a swing of a low of 67 cents-per-pound to a peak of $1.04 per pound as recently as last week, an increase of an astounding 55%,” said Kramer.
“The raw material cost story is about more than just natural rubber, with challenges coming in a broad cross section of commodities. Prices of key commodities such as butadiene and carbon black have risen to 52-week highs in recent weeks.
“We expect raw material costs to remain at heightened levels in 2017.”
Goodyear was the first tire company to announce a price increase in 2017. The tire maker initiated an increase of up to 8% on its consumer and commercial brands effective Feb. 1.
Laura Thompson, executive vice president and chief financial officer, said, “Even since the Detroit Auto Show, we’ve gone up over $300 million in raw material cost increases just in the last three weeks. So it’s quite volatile.”
Another complexity is that there’s a lag of when raw material prices hit a tire maker’s profit and loss statement. Kramer said there can easily be a six-month lag from when the raw rubber is purchased in Southeast Asia to when a tire is produced and sold. It spends time on a ship and on a dock before it ever enters Goodyear’s inventory, and then production time is another extension. Tires in Europe and North America experience the longest delays, while a price hike hits Asia much faster.
Kramer said Goodyear anticipates a $1 billion increase in raw material prices in 2017. That compares to $800 million in 2006, $700 million in 2008 and $2 billion in 2011.
Asked if the company might need to implement another price increase down the line, Kramer didn’t speculate. “We can only speak to the situation that we see at hand. We have a demonstrated track record to deal with what’s thrown in front of us.
“Clearly the raw material inputs that we’ve got have been very volatile and I would even say unpredictable.”
Kramer and Thompson talked about raw material prices during a call with analysts discussing Goodyear's 2016 financial results. Read about that here.