Consumer Tire Sell-Out Rates Remain Elevated
Rising Costs, Lack of Inventory Could Be Headwinds
This MTD exclusive was provided by John Healy, managing director and research analyst with Northcoast Research Holdings LLC and author of MTD's monthly Your Marketplace column.
Recent dealer commentary suggests that consumer demand for replacement passenger and light truck tires during January 2022 was higher on a net basis compared to January of last year and slightly above January of 2020.
However, demand declined sequentially from levels seen in December 2021.
The net number of respondents to our latest survey who indicated that they saw positive demand on a year-over-year basis was 15%, which compares to December’s reading of 43%.
Dealers noted a tight supply environment and inflationary pressures on raw materials and labor — as well as vehicle owners spending the bare minimum on repairs — as catalysts for the sequential decline in tire volume.
We continue to hold a perspective that volumes in the long run will become more closely aligned with the current level of GDP growth, while acknowledging that rising costs and lack of inventory could be headwinds in the near-term.
Region and tier report
From a volume standpoint, we note that the Southeast and Midwest are exhibiting positive trends, with the Southwest and Mid-Atlantic lagging behind when compared to 2021 levels.
We believe January faced headwinds from the omicron variant of COVID-19, as well as the above factors, which may make the road ahead a bit bumpier than we anticipated.
When it comes to consumer preference, our recent survey of dealers shows that tier-three consumer tire brands were extremely popular among end users during the month of January.
Our contacts tell us that this is a function of price increases applied to tier-one brands, as well as dealers’ ability to source less-expensive alternatives.
Now that COVID-19 infection rates are falling, resulting in a more normalized level of vehicle miles traveled, we believe some consumers will opt for more expensive brands in the long-run.
Raw material update
The basket of raw materials needed to make a common replacement vehicle tire rose 27% on a year-over-year basis in January, while increasing on a sequential basis by 4.1% from December 2021.
This continues the trend of increasing raw material price inputs on a year-over-year basis that began at the start of the year, although year-over-year increases have continued to moderate since April 2021 highs.
We believe that holding current spot prices flat would yield a 23.3% year-over-year increase in input costs to build a tire during the first quarter of 2022 — up 3.6% from the fourth quarter of 2021.
In assessing raw material price movements, we note carbon black has seen its price increase on a year-over-year basis for 13 months straight now, while declining 1.9% sequentially from December 2021, as January posted a year-over-year increase of 49.7%.
Crude oil prices saw extreme cost pressures at the beginning of the pandemic. But geopolitical risks have driven oil prices higher in 2022.
We note that January saw a 59% year-over-year increase in the price of oil.
Natural rubber prices declined 1.8% in January, marking the fourth straight month of year-over-year declines as prices moderate. Synthetic rubber costs were up 19% on a year-over-year basis in January, while up slightly less than 1% from December.
Finally, price pressures on tire reinforcement items tracked higher on a year-over-year basis during the back half 2021.
That trend has continued as January showed a 27.3% price increase in reinforcement items.
Consistency is king
When examining the landscape from a longer-term view, we continue to believe that the consumer tire pricing environment in North America will remain rational and in-line with raw material costs.
We expect tire manufacturers to remain disciplined in their efforts to manage the price/volume trade-off in order to maximize operating profit rather than market share.
We are pleased with the disciplined approach to production schedules that we have seen at the manufacturing level.
Furthermore, global tire inventory levels remain relatively lean.
We also continue to observe that tire dealers and wholesalers are being tactical with their approach to inventory allocation given recent pricing actions, supply chain issues and other factors.