'It was a horrible year'
Humbling. That’s analyst Saul Ludwig’s description of 2008, a year in which the sudden collapse of some of the largest financial institutions in the world pushed an already faltering economy into a recession.
As managing director of KeyBanc Capital Markets, Ludwig’s job is to foresee the future for the tire and chemical industries. Although 2008 was clearly an “off” year for him, his track record and insight always make our annual interview with him a valuable read.
“I think there will be more plant closings on the way,” he said a year ago, even after a series of plant closings had reduced capacity and increased efficiency at existing plants.
Since then, Michelin North America Inc. decided not to build a plant in Mexico; Kumho Tire U.S.A. Inc. suspended construction of its plant in Bibb County, Ga.; Cooper announced it was closing its Albany, Ga., facility; and Bridgestone Americas Inc. has notified the union of the potential elimination of passenger and light truck tire manufacturing at La Vergne, Tenn.
“There is just too much capacity chasing too little demand,” he says today. “That leads to low productivity and an inability to price adequately to capture the true value of the product. I expect further capacity shrinkage this year.”
Ludwig began reviewing the tire industry for Modern Tire Dealer’s annual Facts Issue in 1973. His monthly column on market trends, the “Ludwig Report,” has been a magazine staple since April 1975.
MTD: How will small businesses, specifically smaller independent tire dealerships, be affected by the recession? Can we expect an abnormal number of them to close their doors or be bought out?
Ludwig: Some retail tire dealers will have to close, but it will not be a bloodbath. Replacement consumer tire demand should be relatively stable, or even improve, in 2009. As always, good management will win out and survive. This long period of deferred tire buying will end soon. Service will be a good business in 2009, as consumers will want to be sure the car they have works well.
MTD: In what shape are U.S. financial institutions? I think a lot of people assume all of them are having problems. Will bailout money help them?
Ludwig: Some of our largest financial institutions are in trouble, but most are not. The majority are surviving. For example, not all of them participated in subprime mortgage lending, although the crisis was the result of a combination of bad loans to mortgage owners, home builders and hedge funds. Yes, bailout money helps the likes of some banks and brokerage firms like Citibank, Goldman Sachs and several others, too. I do not see a total collapse of our banking system, however.
MTD: What were your “defining moments” in the industry in 2008?
Ludwig: What a year! The Schaeffler Group’s “sneak attack” on Continental probably topped the list. The pull back in new plant construction by Kumho and Michelin were significant indicators of their view of their long-term outlook for tire demand, not only in North America but also China, where overbuilding has led to substantial overcapacity. And finally, the dramatic collapse in global auto sales and the overall global economic activity were well beyond anyone’s forecast.
MTD: What were the U.S. replacement shipment highlights in 2008 vs. 2007 for passenger, light truck and medium truck tires?
Ludwig: Consumer tire shipments were way down. Passenger tire shipments dropped 6.1% to 191.5 million units, while light truck shipments fell 17.5% to 28.2 million units. I estimate passenger tire shipments will rebound this year, to 195 million units. Light truck tire shipments will continue to decrease in 2009, although not as dramatically.
Replacement medium truck tire shipments decreased from 16.6 million units to 14.7 million in 2008, a drop of 11.4%. In 2009, I project another drop of 7.5%.
MTD: In the original equipment segment, how did the consumer and commercial numbers shake out in 2008?
Ludwig: OE numbers were down across the board. Passenger and light truck tire shipments decreased 20% and 34%, respectively. Medium truck tire shipments were “only” down 2%. Unfortunately, I see further decreases in all three categories in 2009.
MTD: Do you expect the average number of miles driven per vehicle in the U.S. to go up in 2009 vs. 2008?
Ludwig. Yes, I do. With gasoline having tumbled to the $1.60 per gallon level from $4 in the summer of 2008, driving levels should rise in 2009, assuming, of course, that there is not another reversal in oil prices. History has shown that nobody can accurately predict the price of oil, but history also tells us that Americans love to drive their cars. That being said, I’ve based my tire demand forecasts on the assumption that miles driven by consumers will increase 3% in 2009. In the face of a recession, however, commercial truck miles driven could fall by 5%.
MTD: What are your thoughts on the status of North America’s tire manufacturers, including Kumho, which hopes to build a plant in the U.S.?
Ludwig: They have to address excess capacity and their total costs of making a tire here. Management and labor cannot ignore the gravity of the situation.
Today in the U.S., there are 11 non-union plants that produce passenger or light truck tires and 11 union plants. One of each has already been announced for closing in 2009. Over the last five years, seven union plants in the U.S. have been closed, plus two in Canada. Imports keep pouring in and now represent 50% of all tires consumed here. The Kumho plant has been “back-burnered” for now. It may never be built. Besides what has already been announced, I would not be surprised to see Goodyear and/or Michelin close a North American plant in 2009.
MTD: How did raw material costs in 2008 compare to 2007? How will raw material costs in 2009 compare to 2008?
Ludwig: After the weighted average raw material bill for a tire rose 4% in 2007, I estimated overall raw material costs would increase about the same in 2008. Unfortunately, I underestimated how much they would rise. In particular, there was a big shortage in butadiene last year, leading to a huge increase in price. Polyester, styrene and carbon black prices also rose significantly.
In 2008, the average raw material cost for a tire was up about 16%, although in the summer months the increase approached 30%. In the aggregate, I expect the average raw material bill for a tire to be down 15% in 2009 compared to 2008.
MTD: Any final thoughts on 2008?
Ludwig: It was a horrible year for the global tire industry as demand tumbled, especially in the second half. Manufacturers were unprepared — their inventory levels were too high. Prior cost reduction initiatives helped but were insufficient to stem the downward slide in profitability.
I worry a lot about overcapacity, especially in China, where several plant closings are likely. But until that occurs, tires may be dumped at low prices in our market here.
As I look back at my beginning-of-the-year predictions, it was indeed humbling to see how far off I was. Hopefully, the crystal ball will be clearer in 2009. ■
Watch out for... Ludwig lists five concerns in 2009
When asked, “What are your top five matters of concern or interest to watch out for in 2009?” analyst Saul Ludwig listed the following:
1. “Wild card” oil prices reversing and going up again.
2. High unemployment. “I worry unemployment could grow to 10%, and that could trump lower oil prices.”
3. Expiring domestic tire plant labor contracts.
4. Plant closings and layoffs.
5. Energy conservation.
“While energy conservation is our goal, I worry that we will see a resumption of driving because gasoline prices have tumbled,” he says. “Our memories are short. I sure hope that complacency and big SUVs don’t return!”