Last month I wrote that due to sharply lower raw material costs during 4Q11, I would not expect to see any further tire price hikes any time soon. Unfortunately, that was a wrong call because predictability of future raw material prices is all but impossible. Since the start of 2012 there has been a sharp upturn in nearly every raw material that a tire manufacturer uses. Carbon black is up 20% and other key ingredients such as natural rubber, butadiene and styrene (used to make synthetic rubber), zinc oxide and chemicals all have turned up, too. Yokohama has already responded with an 8% price hike for consumer and truck tires which started Feb. 1 and Continental increased truck tire prices 9% effective Feb. 15. I would not be surprised to see others follow. Yes, the consumer has been rebelling about price hikes for everything (have you been to your supermarket lately?), but as to tires, manufacturers need to recover costs if they are to be a solid supplier. Additionally, inventories at tire manufacturers were sharply reduced during the latter months of 2011, so there are few excess products that need to be discounted to be sold. So you may want to build some inventory at current prices as I see little risk of seeing those values depreciate any time soon. Higher prices may well be on the way.
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the January 2012 survey are compared with those of January 2011.
Optimism remains for the next six months
According to our dealer survey, roughly 46% of passenger tire dealers believe business will improve over the next six months while 31% believe it will stay about the same. The remaining 23% believe it will worsen. As for truck tire dealers surveyed, 60% see business improving while 30% see business staying about level. Ten percent see business getting worse. Dealers are optimistic that costs will start to come down due to lower manufacturer raw material costs experienced during 4Q11 and the expiration of the Chinese import tariff in September.
January unit sales flat for tire dealers
According to dealer reports, on average, retail sales of new replacement passenger tires were flat when compared with January 2011. High prices, unseasonable warmth and a growing yet shaky economy are all factors that were likely keeping sales volumes from growing. Truck tire sales also were flat in January, but dealers remain optimistic. Retreaded tire sales, which had previously been strong throughout 2011, fell 3%.
Raw material costs surge early in 2012
The average cost for a size 215/60R16 major brand tire was up 1% while the selling price was up 2%. The average cost and selling price for a 215/60R16 private brand tire was flat. The recent surge in raw material costs is making it less likely that tire prices will show any meaningful decrease in the near future, as was previously expected.
Pricing seen as a mixed bag
In January 2012, 46% of passenger tire dealers saw pricing as very firm while another 36% saw it as normal. The remaining 18% saw it as aggressive. Forty percent of truck tire dealers saw pricing as normal while 40% saw it as aggressive and 20% saw it as very firm.
Passenger tire dealers were delaying purchases
Fifty-four percent of passenger tire dealers believed inventories were in line with current business levels, while 31% said inventories were too high. The remaining 15% felt inventories were too low. Roughly 90% of truck tire dealers we surveyed indicated inventories were in line with current business levels, while the remaining 10% felt inventories were too high.
Overall, service outlook remained optimistic
Dealers who provide automotive service reported that 35% of revenues, on average, were generated by service during January. Dealers indicated that service business grew by 7%.
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.