Retread execs go out on a limb: Expect costs, production to rise, they say
What will happen in the retreading industry in the next eight months? Although no one can predict the future with absolute certainty, we thought we'd try anyway.
We asked some of the retread industry's top executives where the market is headed and why.
Analysts in our crystal ball session included Steve McClellan, president of Wingfoot Commercial Tire Systems LLC; John McErlane, president of Tire Distribution Systems (TDS); Roy Bromfield, CEO of Tire Centers LLC; Mike Caswell, director of Bridgestone/Firestone Americas Holding Inc.'s GCR Truck Tire Centers unit; Larry Enders, president of Cooper Tire & Rubber Co.'s Commercial Products Division; and Jack Woodland, chairman of Marangoni Tread North America Inc.
Wingfoot is 60% owned by Goodyear Tire & Rubber Co. TDS is a subsidiary of Bandag Inc. Tire Centers LLC is owned by Michelin North America Inc.
1. What is the most significant issue facing domestic medium truck tire retreaders today?
McClellan: There are two significant issues facing the domestic retread market. One is the growing competition between medium truck retreads and off-shore new tire prices. The second is the National Highway Traffic Safety Administration's (NHTSA) decision to review medium truck tire retreading and the pending legislation that will result from it in Congress.
McErlane: The most significant issue facing medium truck tire retreaders today is the economy. If economists are correct and we are starting a recovery, that has to be good news for our industry. If consumers are purchasing, retailers are increasing their inventories and manufacturers are increasing their production, ton miles will go up. If that positive scenario continues, trucks will roll and more tires will be consumed.
Bromfield: The two most serious issues facing medium truck retreaders today are quality and profitability. If properly marketed and serviced, retreads not only will lower the operating costs of fleet customers, but also will increase profits for the retreader as the result of adding value to the fleet.
Caswell: Production costs -- both material and labor -- are continually evaluated at our plants to provide our customers with the best possible value for their application. On the material side, we continually try to eliminate as much waste as possible. Regarding labor, we continually upgrade equipment and train our associates to work as efficiently as possible.
Enders: Over-capacity and very soft OE demand. The glut on new radial edium truck tires is contributing to severe pricing pressures in the replacement market. While virtually all tier-one or tier-two producers have announced plans to put production more in line with demand, replacement medium truck tires continue to be sold at prices equal to, and in some cases, below the cost of a retread and casing.
Woodland: Maintaining an acceptable level of profitability. Pricing pressures are coming from new truck tires imported from the Far East and Eastern Europe that are selling at levels, in some cases, comparable to medium truck retreads. Other pricing pressures are coming from large manufacturer-owned retread shops such as TDS, Wingfoot and Tire Centers.
2. What is the most significant issue facing domestic OTR tire retreaders today?
McClellan: The cost of doing business in this segment continues to grow. The largest part of the increase is being driven by the capital investment required as a result of the radialization of OTR tires. Also, with the trend of consolidations continuing in the mining industry, the customer is becoming more sophisticated and is demanding lower operating costs.
Caswell: The cost of transporting OTR tires to and from the manufacturing facility. Unless significant quantities of tires can be processed within a reasonable radius of the OTR retread shop, the costs to retread may be prohibitive.
Enders: The shift to radials. Radials generally run longer before requiring retreading. Fewer OTR vehicles were sold last year than in 2000 -- a decrease of 11.6% -- and (the number) is expected to drop again this year. This, and the shift to radial, is shrinking the replacement market.
3. Can retreaders expect raw material prices to rise or fall during 2002?
McClellan: I certainly do not expect prices to decline. If anything, they will follow new tire prices and begin to increase in the near future.
Bromfield: Raw material prices are influenced by a variety of factors. We do not have a prediction for 2002.
Caswell: It is hard to predict what the industry will do during the remainder of 2002. It is doubtful that we will see a decrease in costs.
Enders: Early in 2002, it looks like there will be increases in natural rubber and a stabilization-to-modest increase in other raw materials. But as the economy picks up, material costs will begin to escalate later this year due to increased demand. Early in 2003, we will start to see significant increases in raw material and commodity prices due to the economic improvement driven by government initiatives to promote recovery from the recession.
Woodland: Since demand in 2002 is down for OE and new replacement truck tires, and rubber products in general, raw material suppliers have reduced capacity. If new tires and the retread market have growth back to year 2000 levels, there could be short-term shortages that would increase raw material prices. If demand does not increase, raw material prices will remain flat.
However, there is always the risk that poor profitability and labor cost increases will cause raw material prices to increase regardless of user demand. This will only happen if all major suppliers move in concert.
4. Will medium truck tire retread production increase or decrease during 2002? And what about OTR tire retread production?
McClellan: We will see an increase in medium truck retread production during the second half of the year due to increased market demand and the trucking industry's efforts to control costs. I do not feel there will be an increase in OTR production, as this segment of our industry continues to consolidate.
Bromfield: Overall in the market, an increase or decrease in 2002 retread production will depend on the economy and how the industry deals with excess capacity in new tire production. If over-capacity continues, this may have an effect on the price positioning of new tires, which, in turn, may have an effect on fleet buying behavior relative to both new tires and retreads.
Caswell: We have budgeted for additional increases in 2002 truck tire retread production at our plants and are on target so far. On the other hand, I believe that OTR retread units will be flat or will slightly decline and will continue to decline over the next several years.
Enders: We expect to see moderate increases in production and pricing for both truck and OTR retreading as the year progresses due to increasing demand and the pressure on end-users to hold costs while improving margins. OTR production could increase due to the fact that a number of mines have cut back or closed, and some of those may be reopened or ramped back up.
Woodland: We are very optimistic that retread production will increase in 2002 since fleet owners are keeping their rolling stock longer and OE truck sales are down drastically.
5. What impact will the Michelin-Bandag lawsuits have on the retread industry? (Bandag originally sued Michelin in 1999 for "inducing... dealers to break or not renew their agreements with Bandag and convert to Michelin.")
McClellan: I do not see any significant impact for the overall industry as a result of the current lawsuits.
Bromfield: I can only speak for Tire Centers LLC, but from my perspective, fair and honest competition is healthy for any industry.
Caswell: We cannot comment on pending legislation.
Enders: If certain restrictive elements of the franchise agreement used by either party are set aside or substantially modified, retread suppliers not vertically integrated with OEM and replacement tires will certainly have an enhanced opportunity to penetrate independent commercial tire dealers. Regardless of how aggressively you market retreads, end-users will always focus on cost-to-performance ratios.