Look for tire demand and production to continue to increase
When the last round of tire price hikes were announced last September/October, natural rubber was selling at about $1.50/lb.; today it is at $2.20/lb. There are approximately four pounds of natural rubber in a consumer tire, so that means the cost of a tire to the manufacturer has increased $2.80 just from natural rubber alone in just three months!
Also of note is that the price of oil is now above $90/bbl., and since about 65% of the raw materials used in a tire are oil-based, those raw materials also are going to move higher. So far, Goodyear had an 8% price hike on Jan. 1 for medium truck tires and Michelin announced a 7% hike for some commercial tires starting next month, but I expect to soon hear of another round of price hikes for consumer tires from all manufacturers.
Raw materials were a major headwind for tire manufacturers throughout 2010, and given my expectation that tire demand (and especially tire production) will be growing throughout 2011, I see no reason to expect easing of raw material costs this year.
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the November 2010 survey are compared with those of November 2009.
Passenger tire dealers’ six-month outlook is mixed
According to our dealer survey, the majority of passenger tire dealers sense that in the next six months business will worsen, as truck tire dealers think the environment will remain the same. Roughly 50% of passenger tire dealers suspect business will worsen, 17% expect improvement, while the remaining 33% think business will remain the same. Approximately 67% of all the truck tire dealers sense that in the next six months business will remain about level with currently strong business conditions, while 33% expect business to worsen. These outlook comments tend to be seasonally directed rather than year-to-year comparisons.
All tire sales were higher in November
According to dealer reports, on average, retail sales of new replacement passenger tires were strong with many reporting as much as a 15% increase in November vs. November 2009. Some dealers we surveyed noted that traffic was better than expected in November, and expect modest improvement going forward. Truck and retreaded tire sales were strong, increasing 13% in November year-over-year.
Costs and selling prices were up for major brands
In comparing the month of November 2010 with October 2010, average costs for size 215/60R16 major brand tires were up 3% and selling prices were up about 6%. The average costs for a 215/60R16 private brand tire were down 1% while selling prices were essentially flat for the month.
Pricing remained normal to firm
In November 2010, 33% of the passenger tire dealers described pricing as normal, 17% perceived pricing as aggressive, while the remaining 50% thought pricing was firm. Conversely, 67% of truck tire dealers suggested pricing was normal, while the balance of the truck tire dealers believed pricing was firm. We continue to expect manufacturers to raise prices this year.
Survey indicates tire inventories were in line
Sixty-seven percent of the passenger tire dealers noted that their current inventories were in line with business levels, but the remainder were mixed as 16% felt inventory was too high and 17% too low. Likewise, 67% of truck tire dealers noted that inventories were in line with business levels, while the balance thought that their inventory was too high.
Service revenues are up significantly, dealers reported
According to our tire dealer survey, dealers who provide automotive service reported that 52% of revenues, on average, were generated by service during November. Dealers indicated that service business was up over 14% in November vs. November 2009. Service business remained strong through most of 2010.
Analyst Saul Ludwig is a managing director with Northcoast Research Holdings LLC based in Cleveland, Ohio. He concentrates on the tire and chemical industries. He has been writing for Modern Tire Dealer since April 1975.