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Dealers Report Continued Unit Sales Improvement

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Dealers Report Continued Unit Sales Improvement
 

Our recent conversations with dealers leave us with the view that retail sell-out trends showed stability in November, with a slight drop in momentum from October. From a volume standpoint, surveyed dealers saw unit sales improve by roughly 1% to 2% compared to the prior year’s period, which was still the fourth highest observed growth rate in our tire demand index for the year.

RAW MATERIAL COSTS CONTINUE TO FALL

Looking at the recent trajectory of raw material costs, the cost of raw materials to make a common replacement vehicle tire fell 2.3% on a year-over-year basis in November, while increasing 0.8% from October. This is rather notable as this marks the fifth consecutive month that our raw material index has declined on a year-over-year basis, which last occurred in April 2018. 

Raw material costs fell approximately 5.6% year-over-year through the fourth quarter of 2019. Holding current spot prices flat would yield a 4.2% year-over-year decrease in input costs during the fourth quarter to “build a tire,” or minus 1.3%, from 3Q 2019 to 4Q 2019.

However, notable movements lower in raw material cost pressures have begun to subside. Raw material prices were projected to fall 4.4% year-over-year during the fourth quarter of 2019, while sequentially decreasing 1.5% from 3Q 2019 to 4Q 2019. In assessing raw material price movements, we note that carbon black has begun to see its cost pressures subside on a year-over-year basis, as price decreases of 3.8% is the second month in the row that prices have fallen for the input, after a 1.5% decrease that started the trend in October. This decreased pricing has continued the massive turnaround for carbon black, as pricing had been in double digit, year-over-year growth mode for each month, going back to the beginning of 2018. 

Natural rubber prices rose 18% year-over-year in November, while showing more moderate gains (a 5% increase) on a monthly basis from September. Crude oil prices have experienced notable cost pressures since peaking back in April, with double digit, year-over-year growth in the months leading up to November. Lastly, synthetic rubber costs have remained negative for eight straight months year-over-year and price pressures on reinforcement items (cord, fabric and other components) continue to track negative year-over-year at an upper to mid-single-digit rate. 

Although tire industry profit levels are often held hostage by raw material cost inflation, weather patterns, and competitive dynamics (supply/demand, capacity additions, etc.), we believe that the market continues to strengthen and that the outlook remains healthy for dealers and wholesalers.

In fact, we note that the majority of individuals in the dealer community with whom we have spoken last month have an upbeat outlook for volume trends going forward, driven by the following factors:

1. Continued expansion of the car parc, including an uptick in the number of cars entering the first replacement cycle;

2. The ongoing belief that there is a modest amount of pent-up demand on the sidelines from deferred maintenance, especially given the lackluster results throughout 2017 and most of 2018;

3. Continued upward trajectory of miles driven, and;

4. A solid economic backdrop that has created a healthy, confident consumer. As such, we expect sell-out trends in 4Q19 and 2020 to become more aligned with this level of GDP growth.

SELLOUT LEVELS REMAIN ELEVATED

Recent dealer commentary suggests that consumer demand for passenger/light truck replacement tires rose in November, compared to the prior year’s period. The net number of respondents indicating they saw an increase in demand year-over-year was 25% versus November 2018’s 36.6% of contacts who reported that they experienced growth.

We note that our tire demand index was down 8.5% year-over-year, and down 3.8% from October. But we continue to hold the perspective that volumes are becoming more closely aligned with the current level of GDP growth as our dealer contacts have still seen an impressive 17 straight months of positive volume growth. 

This view is reinforced due to a more stable industry backdrop that sees raw material cost pressures declining and we continue to expect mix trends to improve throughout the rest of the year.    ■

John Healy is a managing director and research analyst with Northcoast Research Holdings LLC based in Cleveland, Ohio. Healy covers a variety of subsectors of the automotive industry. 

 

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