Analyzing the tire industry in 2009 and beyond
The drama brought about by the recession has yet to be played out, according to tire industry analyst Saul Ludwig.
“In a technical sense, yes, the recession is over — but not for the average American,” he says. “The 10% who are unemployed certainly wouldn’t think so.
"We’ve seen some inventory restocking that has yielded improved GDP (gross domestic product) numbers for the last two quarters, but real-end demand is still sluggish. Very simply, the recession took a toll on the tire industry.”
The lingering effects will not shake the guarded optimism he has for our industry in 2010, however.
“If gasoline prices hold in the $2.50 to $2.75 per gallon range, tire demand should improve modestly in 2010,” he says. “Manufacturers’ profits also should be improved from the low levels of 2009.”
Ludwig, a managing director with KeyBanc Capital Markets, has been writing a monthly column for Modern Tire Dealer since April 1975.
However, he began reviewing the tire industry for MTD’s annual “Facts Issue” in 1973.
Editor Bob Ulrich sat down with Ludwig to discuss the highs and lows of a very dramatic year, which encompassed not only a historic recession, but also the imposition of an additional 35% tariff on consumer tires imported from China.
MTD: Now that the dust has settled, what effect has the 35% tariff, which went into effect on Sept. 26, had on the industry, from tire manufacturers to consumers?
Ludwig: For manufacturers, there has been little impact. Prices were increased to cover the tariffs. However, some North American manufacturers are gaining share as imports to the U.S. are down dramatically.
It’s a totally different story for private brand marketers. The tariffs have made life more challenging for some, as their main source of supply and competitive edge was compromised. They now will have to look to Korea, Taiwan, Indonesia, maybe even Malaysia and Thailand for product.
The tariffs had little impact on most tire dealers. As a general rule, they almost always had some product available to make the sale because they carry eight or nine different brands. But certain sizes did become more difficult to get late in the year, causing some consumers to have to wait one or two days to get the tires they required.
When manufacturers raise prices, the pricing of tires in inventory, which were purchased at a lower price, also gets raised. So the tire dealers we talked with had a pretty decent year, even though they sold fewer tires.
For consumers, prices went up $3 to $5 per tire, but considering that a consumer buys new tires once every four years, having to pay up to $20 more for a set of four tires did not stop them from making a purchase. Additionally, the price gap between low- and medium-end tires narrowed.
Overall, the tariffs will have an effect on the number of consumer tires imported from China for the next three years. By the time the tariffs expire in September 2012, however, China’s own need for tires may keep imports to the U.S. from reaching pre-tariff levels. It may not have the capacity to ramp up imports again.
There will always be tires from China in the U.S. marketplace. There just might not be as many.
MTD: What were your defining moments in the industry in 2009?
Ludwig: I saw four defining moments. The most significant — and contentious — event was the imposition of tariffs on Chinese consumer tires for three years at a diminishing rate.
Also, there were no strikes in conjunction with the major labor contract talks between the union and tire companies. The acrimony from prior years was not there. The manufacturers wanted to control wage rates and improve productivity. The union wanted to retain job security at the highest possible level. In the end, the negotiations with Goodyear (four years), Bridgestone (four years) and Michelin (three years) were successful, and all the parties thought the contracts were fair.
Falling raw material costs for most of the year — although they rose in the fourth quarter — was significant. Oil, gas and other raw material costs went down in contrast to 2008, when oil surged to $140 a barrel. Raw material costs were a headwind in 2008, and a tailwind in 2009.
The fourth defining moment was the absence of Goodyear, Michelin, Bridgestone, Continental, Kumho, Toyo and others at the SEMA (Specialty Equipment Market Association) Show. It was somewhat of a surprise. Cooper, Han-kook, Pirelli and some smaller Far East companies did have booths.
MTD: What were the United States shipment highlights in 2009 vs. 2008 for passenger, light truck and medium truck tires?
Ludwig: Replacement and original equipment shipments were down across the board in 2009. I predicted decreases in all categories except replacement passenger tire shipments. I underestimated the degree to which people would continue to drive on worn-out tires.
Replacement passenger tire shipments ended up falling 3%, from 193.8 million units to 187.9 million. OE units were down 36%, from 37.6 million to 24.1 million.
Light truck tire shipments dropped 7% at the replacement level, to 27.4 million units. At OE, LT shipments were down 5%, to 2.8 million units.
The medium truck tire shipment drops were more dramatic. Replacement units were down 14%, to 12.7 million, while OE units were down 36%, to 2.4 million.
It is important to note that industry shipments reflect the manufacturer-dealer relationship, not dealer sales to the consumer. Because of the recession, dealers had liquidity concerns, which drove down their inventories in 2009. However, they did not necessarily replace everything they sold. So a dealer may have sold 5% fewer tires than in 2008, but his actual tire purchases may have declined by 10%.
I predict the passenger and medium truck tire segments, at both replacement and OE, will rebound in 2010. Light truck tire shipments will increase modestly at the replacement and OE levels.
MTD: How did raw material costs in 2009 compare to 2008? How will raw material costs in 2010 compare to 2009?
Ludwig: On average, raw material costs decreased by 15.4% in 2009. That compares to an overall increase of 14.7% in 2008 vs. 2007.
Butadiene was down 51.7%, while Styrene dropped 37.6%. Natural rubber and carbon black prices also were down significantly.
Remember, that’s a weighted average. The prices dropped from January through July, but in August started to creep up again.
They actually increased about 20% from the third quarter of 2009 to the fourth quarter. That increase necessitated a round of appropriate price increases by manufacturers.
If the pricing in December were to stay in place throughout 2010, the weighted average of raw material costs would be 10% higher than the average in 2009.
MTD: As always, thanks for your insight, Saul. ■
Ludwig has questions of his own -- The answers will help define our industry, he says
When asked, “What are the areas of concern or interest to watch out for in 2010?” tire industry analyst Saul Ludwig answered the question with questions of his own.
1. How will importers of Chinese tires reposition their supply lines? How will Chinese tire manufacturers reposition capacity?
2. Other than plants already scheduled to close in 2010, will any other plants be closed?
3. Will Pirelli SpA separate its tire business from all its other businesses? How will the Continental AG-Schaeffler Group union hold up?
4. If Goodyear Tire & Rubber Co. CEO Bob Keegan retires in 2010, will there be any strategic shifts under a different CEO?
5. Will Titan International Inc. CEO Morry Taylor see his dream of selling large quantities of 63-inch tires materialize, and will he be able to pull off other farm tire acquisitions he is targeting?
“Global geo-political developments involving terrorism, Middle East confrontations or major financial traumas could have dramatic ramifications for the U.S. economy and the tire industry,” he says. “And economically speaking, we certainly are not out of the woods yet as the growing U.S. budget deficit remains a major concern.”