Recession catches up with OTR tire market
Attention, OTR tire dealers: Don’t expect the “same old” in 2009. A number of changes are taking place that will impact the market, starting with the mining industry, where activity is slowing down after several extremely robust years.
Production curtailments have been announced by various companies, expansion plans have been put on hold and in some cases, jobs are being eliminated.
The slowdown in the mining industry has started to spill over to the new equipment side of the business.
Last month, Caterpillar Inc., whose machines are synonymous with mining, said it will cut 20,000 jobs, citing its weakest operating environment in 60 years.
OTR tire manufacturers and dealers agree: It’s going to be a different kind of year.
Commodity is king
Mines are reducing production mainly due to lower commodity prices, says Shawn Rasey, president, Off Road Division, Bridgestone Americas Tire Operations LLC (BATO). For example, copper is selling for slightly less than $1.50 a pound, down from more than $3 a pound at the beginning of 2008. Zinc has fallen from around $1 per pound approximately one year ago to some 50 cents a pound.
The collapse of the housing market has been a primary driver. “Producers are trying to get their cost structure in line to meet the realities of demand.”
Gary Nash, director of OTR sales for Yokohama Tire Corp., says many large copper mines in the western United States “have really slowed down. They’ve laid off, they’ve consolidated... there are a lot of things going on that indicate we’re in for maybe a two- or three-year decline in ore prices.”
However, the dearth of construction projects and housing starts has yielded a silver lining: Supply of smaller OTR tires, including those in the 25-inch range, has caught up with demand.
“Supply started catching up as early as March 2008,” says Nash. “There is a prominent overstock of small bias and radial OTR tires right now.”
That balance could change again if the proposed federal stimulus package — which contains provisions for infrastructure maintenance, repair and construction — is passed.
“States have projects they would like to put in place,” says Rasey.
“A lot of it will be dependent on the timing and impact of the economic stimulus package that Congress is considering.”
Coal and BRIC
While supply of smaller OTR tires has improved, supply of large OTR tires — including 49-, 57- and 63-inch tires — remains tight.
In fact, Yokohama’s Nash says it will be as long as five years before supply of giant tires completely catches up with demand, thanks, in part, to coal mining.
“The coal market is still really strong even though fuel costs have lowered a great deal. There’s still big demand for coal.”
Glasgow, Ky.-based B.R. Retreading is reaping the rewards. The company sells OTR tires to dealers who service mines throughout Appalachia.
“Coal prices are still up,” says B.R. Retreading President Dennis Bull. “We’re in a good situation in the eastern part of the U.S.”
Coal mining is gaining steam in other parts of the world, including China, where coal-fueled power stations are being built at a rapid rate. “Many people will focus on coal in the coming years because there’s still a big demand for it,” notes Nash.
While some mining and construction projects in BRIC (Brazil, Russia, India and China) countries are slowing down, overall demand for large OTR tires in those nations remains relatively healthy, according to tire manufacturers.
“The BRIC countries are feeling the same effects of the recession as we are,” says Bridgestone’s Rasey, “but I would suspect demand won’t change significantly unless we have complete global economic meltdown.”
Meanwhile, production ramp-ups at various OTR tiremakers will continue as these companies pump new products into the pipeline.
“We’re right on target” with production increases, according to Rasey.
Bridgestone Corp. has completed expansion projects at two of its plants in Japan. “Our Bloomington, Ill., giant tire plant expansion will be fully operational” sometime this month.
Another plant, a green field project in Japan, also is on schedule. All told, Bridgestone’s OTR plant expansions represent $1 billion in investment.
Yokohama Rubber Co. Ltd.’s second OTR tire plant in Japan began cranking out 49-, 51- and 57-inch tires three months ago.
Half of the tires made there will go to mining giant Barrick Gold, Yokohama’s partner in the venture; the majority of the rest will be earmarked for the U.S. market, says Nash.
“We have two more projects planned,” he reveals. “The third is to build a factory for underground and port authority tires in Japan. But it’s been put on hold until we can re-evaluate what demand is going to be in these areas.”
The other project, which Nash admits “is a long way off,” is a possible 63-inch tire plant. It would be built in the U.S. or South America. “It also could be Japan.”
Both Michelin North America Inc. and Goodyear Tire & Rubber Co. are making OTR tire production a priority. Michelin’s Lexington, S.C., OTR tire plant is expected to continue to play a prominent role in the firm’s supply strategy.
While Goodyear is implementing partial truck tire production curtailments at its Topeka, Kan., plant this month and in March, OTR tire production there will continue as usual, according to a company spokesperson.
Titan International Inc. continues to build 63-inch tires at its plant in Bryan, Ohio.
The company shipped its first batch of 63-inch tires this past summer.
“We’re in a global economy now,” says Paul Hawkins, president of OTR sales for Titan.
“What happens anywhere in the world seems to have an effect here.”
Bob Youell, co-owner of Best One Giant Tire Inc. in Jeffersonville, Ind., says his company is gearing up for a different sort of year.
“I think it’s going to be soft,” he says. “I’ve talked to my customer base — quarries and construction companies — and they tell me their business will be off by 6% to 10%.
Some OEMs have told us they’ll have double-digit decreases.”
The construction industry has been hit particularly hard, he explains. “There’s a lot of construction outside of timber and bricks.”
Reduced activity has resulted in “plenty of 25-inch radials, almost a glut. And the prices on 25-inch radials have come down.”
On the giant tire side, demand “is easing. It’s not as severe as it was even a year ago.”
The OTR tire business is cyclical, says Yokohama’s Nash. “Historically, if you look at the OTR market, you usually have five years of short supply and five years of over-supply.”
One of the key differences now versus the past is that “manufacturers were unable to ramp up their production because of the uncertainty of the market.”
What does the rest of the year hold for the domestic OTR tire market? Rasey says the “volatility in commodity prices makes predicting 2009 pretty rough.”
In the meantime, OTR tire dealers would do well to manage their assets and inventories, says Youell.
“Hopefully in 2010, things will get back to where they should be. You can hit the panic button or accept this as a challenge.” ■