Higher Raw Material Costs Put Upward Pressure on Replacement Tire Prices

By Mike Antich

Replacement tires are the second highest operating expense for commercial fleets, next to fuel. Retail transaction prices for light-truck replacement tire costs were up 12.5 percent in 2010, while tire costs in the passenger car segment were up 11 percent. Although retail tire prices increased, replacement tire pricing for commercial fleets remained relatively flat because of pre-existing national account pricing agreements. However, it would be short-sighted to believe national account vendors will indefinitely absorb tire cost increases without passing them on to their fleet customers.

Increased Demand for Tires
There are more than 1 billion tires manufactured annually in 450 tire factories around the world. Almost 60 percent of the world’s rubber is consumed by the global tire industry, with the remainder purchased by the general rubber products sector. China is now the world’s largest rubber consumer, surpassing the U.S.

Increased global demand for tires is being fueled by the increasing volume of vehicles produced in China (now the world’s largest auto market), South Korea, and India. The forecast is for a 6-percent rise in world auto sales in 2011, which follows a 10-percent increase in 2010. This growth has led to a sharp increase in tire demand, with raw material supply struggling to keep up. Global rubber production is forecast to continue to lag behind OEM demand. In 2010, there was a 60,000-ton shortfall in rubber production. The International Rubber Study Group forecasts that by 2020, there will be a 3-million-ton shortfall of natural rubber in the world. The study states most rubber-growing countries are not in a position to substantially increase their capacity to meet this growing demand. Vietnam and Ivory Coast are the only countries with plans to increase supply.

Higher Raw Material Costs
There are two types of rubber used in tire manufacturing – natural and synthetic. Natural rubber is made from latex harvested from rubber trees, while synthetic rubber is synthesized from chemicals sourced from petroleum refining. Since tires are produced with more synthetic rubber than natural rubber, higher oil prices have put additional upward pressure on tire prices. In addition, DuPont, which is a major supplier to the tire industry, has increased the cost of neoprene, along with other chemicals, used in synthetic rubber.

Natural rubber prices are at a historic high due to surging demand for the product in Asia. Another factor contributing to higher commodity prices is speculation in futures pricing. Also, the ongoing political instability in the Middle East and North Africa has led to higher oil prices, impacting synthetic rubber production.

The three largest rubber-producing countries are Thailand, Indonesia, and Malaysia, which account for 72 percent of all natural rubber exports. Heavy rains and flooding in these nations in 2010   hampered rubber harvests, causing higher prices. In first quarter 2011, prices continue to stay elevated as the rubber-growing industry enters its low-production season, known as wintering, when rubber trees shed their leaves. The wintering season is February to May. During this period, rubber production shrinks 45 to 60 percent from peak production, which compounds the imbalance between supply and growing demand, exerting further pressure on commodity pricing. Higher raw material costs are the most significant challenge facing the tire industry, according to Rich Kramer, chairman, CEO, and president of The Goodyear Tire & Rubber Company. All national tire brand manufacturers have raised prices to offset the increased cost of raw materials.

Other Variables Impacting Tire Costs
Another variable increasing tire prices is larger wheel size diameters. Auto OEMs continue to increase the size of tires on new-model vehicles, which has resulted in higher replacement tire costs. The larger the tire, the more material it takes to produce the tire, which consequently increases the cost of the replacement tires. Larger diameter tires can add $100 to $200 in additional expense per set of tires. From a vehicle selector standpoint, the costs for replacement tires can vary as much as 30 percent or more for different tire sizes on the same vehicle. With fleets deferring replacements, they have accrued additional tire costs, where in the past, a vehicle would have been sold prior to tire replacement.

High Oil Prices May Curb Global Tire Demand
The high price of oil has the potential to cause another global economic slowdown and with it a weaker demand for rubber. In the long run, growth in rubber demand may be undermined by a faltering recovery. In addition, the long-term outcome of turmoil in the Middle East and North Africa remains unpredictable. One wildcard scenario may find ourselves dealing with adversarial governments with the potential of future supply disruptions.

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(Photo courtesy of Aldin at stock.xchng)