Will Inflation Interrupt Tire Sellout?
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.
Our recent conversations with dealers leave us with the view that retail sellout continues to climb upwards on a year-over-year basis compared to March 2021.
We note that trends improved through the first quarter of 2022, with March showing the greatest year-over-year volume improvements during that period. We believe this is due to consumers investing more in their current vehicles instead of chasing new or used cars at elevated price points.
Demand also is up significantly versus previous months during 2022. The net number of respondents to our latest survey who indicated that they saw positive year-over-year demand during the month of March was 30%, which compares to smaller readings in February and January 2022.
Our contacts largely feel the shortage of new cars and high used vehicle prices — coupled with rising interest rates that make monthly car loan payments larger — are the greatest factors driving the increased level of replacement consumer tire demand.
Additionally, we would highlight that tax refund payments are lagging behind, which may create a near-term tailwind in replacement tire demand as consumers receive refund payments later than during typical years.
On the other hand, we do note that some respondents are worried that rising inflation may serve as a headwind for tire demand as consumers’ dollars continue to be stretched
Still Miles Ahead
While miles driven are down slightly from prior-month levels, miles driven during March 2022 increased 5.3% versus the same period in 2021.
And while rising gas prices due to geopolitical risks remain a concern, recent historical analysis suggests that demand for gas will continue to be sticky and poses a minimal threat to a possible, severe reduction in vehicle miles traveled.
The number of people searching for driving directions remains elevated, according to Apple Mobility Trends, which will no longer provide updated COVID-19 mobility data.
Looking at a breakdown of U.S. geographic regions, the Midwest and Southeast are exhibiting positive tire demand trends, while the Southwest lags behind. (Last month, we reported that demand in the Southwest was up, while demand in the Midwest was down.)
Give Me Two
We note that tier-two brands were the most in-favor among consumers during March, according to dealers who responded to our latest survey.
Given the extensive price increases by tire manufacturers over the last year, we see this trend as an indication that consumers have grown accustomed to rising costs across all goods and are willing to pay for more expensive tires and brands.
As noted many times in the past, we believe that consumers changed their brand preferences in response to COVID-19. As the pandemic appears to be largely behind us, we believe that tier-two brands will remain attractive to consumers.
Most raw material prices continue to rise, as reported in previous months. The basket of raw materials needed to make a standard replacement vehicle tire rise 37.9% on a year-over-year basis in March. (We reported that it increased 30.1% on a year-over-year basis in February 2022.)
In assessing specific raw material price movements, we note that carbon black has seen its price increase on a year-over-year basis for the 15th month in a row, while increasing 1.5% from February 2022.
Geopolitical forces continue to drive crude oil prices higher.
March experienced a 74.1% year-over-year increase, while posting a sequential increase of 18.4% from February 2022.
The price of natural rubber increased 2% on a year-over-year basis in March, breaking the trend of five straight months of year-over-year declines. Synthetic rubber costs were up 20.1% year-over-year in March 2022. This also is up nearly 1% from prior month levels.
And we note that price pressures on reinforcement items like cord and fabric continue to track higher on a year-over-year basis, continuing a trend that carried over from 2021.
In March 2022, prices on these items jumped 43.2%, according to our research. This ties with the increase experienced during February 2022, which was the largest jump we have seen since we began tracking this particular input in 2005.