Inflation Takes Bite Out of Tire Demand
Interest Rate Hikes Could Pose Another Challenge
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 conversations with tire dealers leave us with the view that retail sellout trends have slowed and turned negative on a year-over-year basis.
We note that April was the strongest month of last year in terms of retail sellout, while April was the weakest sellout month so far in 2022.
The net number of respondents to our latest survey who indicated they observed positive year-over-year tire demand was fewer than 50%, which compares to higher demand rates experienced during the months of March and February.
One of our contacts noted that sellout trends have slowed so much that he is struggling to keep his business afloat after a strong 2020, which saw his dealership achieve record-high volume and gross profit.
While we recently indicated that tax refund payments have lagged previous years and we believed there may be a near-term tailwind to replacement tire sales given the delayed refunds, it appears that this will not be the case. Refunds were still not enough to drive higher unit volume as tire manufacturer price increases and inflationary pressures on the broader economy worked to dampen consumer spending.
While we continue to hold our long-term view that volumes will ultimately become more closely aligned with current levels of GDP growth, we will closely watch Federal Reserve actions as interest rate hikes pose a risk to economic expansion and could drive short-term GDP contraction.
While we have reported that tier-two tires continue to be preferred by many consumers, respondents to our latest survey tell us that tier-one tires were most popular among their customers last month.
As lower-tier tires typically perform well when tire prices are on the rise, we are a bit surprised to see strong demand for tier-one products and believe that consumers who have been less impacted by inflation are contributing to tier-one brands’ popularity.
Respondents also have told us that tier-three brands are gaining traction, which we believe is indicative of the current economic environment as many consumers are feeling the pinch of inflation.
One of our dealer contacts told us that he is seeing much greater consumer interest in opening price point tires due to the current pricing. Looking forward, however, we believe that most consumers will opt for tier-two tires in the long run as they strike a balance between value and other attributes.
Impact on miles driven
Miles driven also appear to be declining - albeit slightly. April 2022 showed a 1.8% decline versus the same month in 2021.
While rising gas prices due to geopolitical risks are a concern, our recent data analysis suggests that demand for gas will remain steady and poses a minimal threat to a large reduction in vehicle miles traveled.
That said, we do feel that sustained pain at the gas pump - coupled with rising inflation in all areas of consumer spending - will have an impact on vehicle use.
Update on raws
When examining the landscape, we continue to believe that the pricing environment in North America will remain rational and in-line with raw materials costs.
The basket of raw materials needed to build a common replacement consumer tire rose 33.7% on a year-over-year basis this past April, while decreasing on a sequential basis from the previous month.
This continues the trend of increasing year-over-year raw material inputs that began at the start of 2021, with year-over-year increases in April and March at the highest levels since spring 2010.
Of all the raw material components we track, only natural rubber decreased in cost during the latest tracking period, dropping 4.4% on a year-over-year basis.
All other components have increased in price - most dramatically carbon black and oil. We note that the price of carbon black jumped 66.3% in April 2022 - the largest increase in carbon black pricing we have seen since 2005.
The price of crude oil increased 63.1% during April, though this was an 8.5% drop from crude oil prices observed during the previous month.
Synthetic rubber prices were up 21.4% in April, year-over-year.
The price of reinforcement items like fabric and cord continues to increase, which continued the trend that began last year. In April, reinforcement item prices rose by 42% - the largest year-over-year increase since we began tracking these components 17 years ago.