'Where are they?'
Construction -- both commercial and residential -- is healthy. The mining industry has bounced back. Machines are wearing out OTR tires at an ever-increasing clip.
It's a great time to be an OTR tire dealer -- if you can get product.
OTR tires have been so hard to come by that veteran dealers are shaking their heads in disbelief. "We've been at this a long time and I've never seen a shortage like the one we're experiencing," says J.D. Chastain, president of Redburn Tire Co. in Phoenix, Ariz.
The fact that large OTR tire shipments (size 16.00x20.5 and bigger) were up in 2004 versus 2003 only adds to the confusion. Replacement large OTR tire shipments last year totaled 223,000 versus 215,000 the previous year, according to Modern Tire Dealer statistics. Original equipment large OTR shipments for 2004 were 92,000 versus 81,000 in 2003.
Coming up short
Availability is the single biggest problem facing OTR tire dealers, according to Al Chicago, senior vice president of Potosi, Mo.-based Purcell Tire & Rubber Co. Supply problems first became apparent last summer, he says. Smaller sizes, including 25-inch tires, dried up first. "Then all of a sudden, (the shortage) extended to everything."
Supply has since become so tight that manufacturers are giving allotments to dealers. "They're saying, 'This is the number of tires we're supplying you next year, and that's it.' This has never happened before."
"When we first saw the shortage, we thought, 'This isn't for real,'" says Chastain. "But it is for real. Construction is really brisk. All of the (mineral) commodities are doing quite well. China has taken off and is taking some supply they normally wouldn't.
"This is not a contrived shortage. Availability is horrific. It's been a real struggle to get product."
Securing radials has been especially difficult, says Dick Dempster, president of Dempster Tire Sales in Middletown, Ohio, which is north of Cincinnati. "Radials are coming out on more new equipment and the manufacturers can't make enough of them."
Dempster sells Continental brand OTR tires to construction companies and steel mills. The biggest OTR tire he stocks spans 45 inches. "I can't complain about my supplier. They're spreading (supply) out as best they can."
Chastain reports the shortage has reduced his OTR tire inventory to about half of what it was this time last year. "It's a lot leaner. In some cases, a tire is pre-sold before you ever get it in."
He has met with OTR tire manufacturers on a number of occasions to discuss supply. He's been told that availability in 2005 will be even more anemic than it was last year. "When you can't get a running start, it's going to be worse.
"We haven't witnessed it, but there's a chance that some mines are parking their trucks" due to lack of replacement tires.
More than one dealer who spoke with Commercial Tire Dealer says manufacturers are directly negotiating with end users. "The dealers are getting squeezed," says one. "We have no control over tires or their selling price."
Right from the source
CTD decided to take dealers' concerns directly to OTR tire manufacturers. The following executives provided answers: Rob Andrew, global marketing manager, OTR Tires, Goodyear Tire & Rubber Co.; Manny Cicero, president, Bridgestone/Firestone Off-Road Products; Bob Harnar, director of sales and marketing, Global OTR Business Unit, Continental Tire North America Inc.; Gary Nash, director of OTR, Yokohama Tire Corp.; and Todd Ramsey, director of marketing, Michelin Earthmover Tires.
1. Large domestic OTR shipments, both replacement and OE, were up in 2004 versus 2003. Yet dealers are reporting that OTR tire supply is extremely tight. Why is demand exceeding supply? Where are all these additional tires going?
Andrew: There are several reasons why OTR tires are in short supply. Since customer demand remained conservative based on a less than glowing economy, manufacturers have been reluctant to invest capital to expand capacity. It has only been recently that we've seen some tiremakers announce capacity expansions.
Regarding larger tires, the improvement in the global economy driven by China's growth, higher demand for raw materials, the Iraq war, and continued strength in the quarry and construction sectors of the market have contributed to this demand.
But the main reason why demand is now exceeding supply is that all of the inventory reserves were sold off in the second half of 2004. The market must now live off of installed capacity.
Cicero: Today's strain on tire supply is resulting from a skyrocketing demand for OTR tires around the world. The demand for tires utilized in the mining industry continues to rise as mines strive to maximize production. Measures to increase production -- such as lengthened hours of operation, quicker haul cycles, better truck utilization or the addition of new vehicles -- causes the requirements for tires to escalate.
Coinciding with the increased tire demand in mining is an increased demand for tires in the construction and aggregate industries. Road-building projects spurred by the prospect of federal funding problems in the U.S., coupled with the need to build infrastructure in emerging nations, are driving demand for tires.
At the OE level, in addition to demand for new equipment due to growth in the mining and construction segments, the rental industry has reached a replacement cycle, further driving demand. Though tire plants around the world are running at full capacity, production output is unable to meet demand.
Harnar: The current worldwide radial OTR shortage is the result of two completely different situations that have taken place at the same time. The first event, which started in mid-2003, was the fact that the global economy heated up so dramatically. Both the need for replacement tires and original equipment demand increased significantly. Most tire manufacturers were not prepared for this.
To compound the problem, a second situation gobbled up tires: the military requirements needed to support the war in Iraq. The major tire manufacturers supplying government contracts were forced to switch to building machines to produce unique, military-size tires. This caused a reduction in the production of many more popular wide-base size tires used on equipment around the world.
Nash: Heavy radial increased in 2003 through 2004 because of the Iraq war, U.S.-based manufacturers moving offshore in mining and heavy demand from China, India, South America and other countries for products. The export business is strong and is taking lots of supply from the U.S.
Ramsey: There is a worldwide constrained capacity issue for some OTR tires. This results from a 30% increase in demand in 2004 versus 2003. This demand is unprecedented in the history of the industry and was unanticipated by the industry.
2. What are you doing to correct the OTR tire supply situation? Are you going to produce more tires?
Andrew: Goodyear is investing limited capital to increase capacity in 25-inch radial tires globally. In addition, Goodyear is exploring other opportunities, such as improving manufacturing efficiencies, allocating finished products to improve product flow, and finding tire alternatives like bias in lieu of radials.
Cicero: During 2004, Bridgestone added new building and curing machines to several OTR plants, resulting in a small improvement in output. Bridgestone also announced a capacity expansion at its Hofu, Japan, plant for the production of small radial off-road tires. Added production resulting from this $120 million investment will be available beginning in the second half of 2006.
Harnar: CTNA's Bryan, Ohio, plant was producing both OTR radial and bias tires at maximum capacity for most of 2004 and continues to pursue higher levels. Projects are underway to increase OTR production at other plants in the CTNA family around the world. We are working to expand our small radial tire production in the Czech Republic as well as our bias OTR tire output in Malaysia.
Nash: Yokohama is planning to increase production by 8%.
Ramsey: Since the beginning of increased demand, Michelin has maximized production at our facilities and is running flat-out at our plants. Long-term capacity expansion takes a minimum of 18 months to build and implement. This simply cannot be put in place inside one year.
3. When will the OTR tire supply situation return to normal? In the meantime, what is your advice for OTR tire dealers who are struggling to get tires?
Andrew: Some experts have predicted late 2007. OTR dealers should investigate and anticipate customers' needs even more closely than in the past.
Cicero: Based on historical demand cycles, the current up-cycle in demand in the U.S. is expected to continue for the next several years, with 2007 and 2008 its peak. So -- especially during 2005 -- dealers should strive to extend tire life through best practices, such as proper rotation, air pressure checks, and vehicle maintenance.
Harnar: We don't see a return to normalcy through the year 2006, considering global economic demand, including China, and military requirements. The local tire dealer needs to establish closer relationships with tire manufacturers and work together to improve their profit margins.
Ramsey: We are doing everything possible to provide all of our customers with as many quality tires as possible, as quickly as possible.
4. What will OTR tire supply be like in 2005?
Andrew: Supply will be very difficult for all involved. There will not be enough large radial and bias tires to go around. Small radial markets will be short, but not as severe as the large market.
Cicero: Due to the long lead time between the time new equipment is ordered for a tire plant and when that equipment is available for installation, current planned expansions will offer only limited production improvements in 2005, with gradual improvements in 2006 and beyond.
Harnar: Supply will continue to be very tight.
Nash: Supply will remain critical during all of 2005 and should start to catch up by mid-year 2006. All manufacturers are under the same strain.
Ramsey: It is not expected that the market will change dramatically in 2005.