Dealers Continue to Experience Steady Demand
Outlook is Sunny Heading into 2022
This MTD exclusive was provided by John Healy, author of MTD's monthly Your Marketplace column and a managing director and research analyst with Northcoast Research Holdings LLC.
Recent dealer commentary suggests that demand for consumer tires last month was higher on a net basis than it was during the same month in 2020.
The net number of respondents to our most recent survey who experienced positive year-over-year demand was 45%, which compares to previous-month levels of 57%.
Our contacts noted that the slight fall-off was likely attributable to the unpredictable nature of the auto repair business, as the third quarter was described as showing near-record strength in tire demand.
However, we also note that this optimism has been waning since the end of August.
We continue to hold the perspective that long-term volumes will become more closely aligned with the current level of GDP growth, while consumers continue to thirst for the road and increase their driving habits compared to last year, when there was more uncertainty due to the impact of the COVID-19 pandemic.
A regional look
We also note that dealers in certain regions of the country have experienced more tire demand than dealers in other areas.
From a volume standpoint, during the month of October, both the southeastern and midwestern U.S. exhibited positive trends compared to 2020 levels, but the southwestern part of the country lagged behind somewhat.
We believe that tire demand will continue to benefit from the rebound in driving levels to a more normalized state. Miles driven were at a much more depressed level this time last year.
The latest on tiers
Our surveys ask dealers to provide commentary around the sales performance of different tiers of tires at their companies.
For the first time in many months, feedback indicates that consumers favor tier-one tires. We view this as a function of consumers having more cash on hand than they did during previous months, along with consumers putting more into their vehicles as they await the cooling of the new and used car retail markets.
That said, given the extensive price increases that have taken place over the last year, we are a bit surprised to see that consumers now seem to favor tier-one products over less expensive alternatives.
While prices have gone up more or less in unison across manufacturers of all tiers, the absolute difference in tire prices is greater than it was prior to the pandemic, causing tier-one tires to have a bigger dollar spread than other offerings compared to last year.
We have seen that consumers seem to change their preferences for different products due to what is happening at the moment with COVID-19.
There is a belief that the COVID-19 situation is largely behind us, given vaccination rates.
However, there will continue to be a preference for both tier-two and tier-three tires over the long run, as customers strike a balance between value and performance.
Raws are going up
Looking at raw material prices, the “basket” of raw materials needed to build a standard replacement vehicle tire rose 23.2% on a year-over-year basis in October, while increasing on a sequential basis by 4% from September. This continues the overall trend of increasing raw material inputs on a year-over-year basis that began at the start of 2021, though year-over-year gains have moderated since April highs.
Holding current spot prices flat would yield an estimated 21.6% year-over-year increase in input costs during the current quarter.
In assessing raw material price movements, we note that carbon black has seen its price increase on a year-over-year basis for 10 months in a row, with a continued upward trend in year-over-year gains.
Crude oil prices experienced a 99.8% year-over-year increase during October.
Natural rubber prices declined by nearly 12% in October on a year-over-year basis — the first year-over-year decline in this category since July 2020.
Synthetic rubber prices rose 31.2% in October on a year-over-year basis, continuing the trend from August and September — the highest level seen since October 2011.
As we look to the start of 2022, we note that many individuals in the dealer community have an upbeat outlook for volume trends going forward.
This optimism is being driven by several factors, including the expected continued upward trajectory of miles driven.