Insights Industry Insights On a Roll

       

Tires: On a Roll

By: AccuVal Associates, Inc.

Over the past few years, the tire industry has seen tremendous growth. In particular, the OTR (off-the-road) and truck tire segments have noted marked increases, for both new radials and retreads. As global demand for tires increases – it's expected to surpass 1.8 billion units by 2017 – manufacturers will see opportunities for growth. At the same time, facilities will need to increase their production capacities to keep up with building demand.

Because the majority of materials needed to manufacture tires are commodity-based, material costs fluctuate as market prices change. This uncertainty, coupled with heightened demand for raw materials (including natural rubber, oil, steel and carbon black) and market speculation pushing up energy costs is leading tire makers to raise prices while attempting to absorb some of the rising raw material and energy costs themselves. All of this leaves the tire market in a state of change, with tire manufacturers gradually passing on these rising costs to both wholesalers and retailers. Overall, the industry fared well in 2011, with most manufacturers seeing sales and net earnings gains over the previous year.

SUPPLY

Shortage of casings on the rise

Because the supply of new radial truck tires hasn't been able to keep up with demand, there became a shortage of casings. In fact, the industry had to import 1.5 million of them in 2011. Retreading is a cost-effective alternative to buying new tires, as it can help lower tire expenses. Salvaging an existing tire casing and applying new tread is an environmentally friendly process, as three or four lives out of a casing is very achievable. Although savings can be found from using retreads, the rising demand and shortage of usable casings is pushing the costs up, as well.

Oil prices increase as natural rubber prices stabilize

Several oil derivatives, such as naphtha, make up about 60 percent of most tires. Spot prices for crude have generally been rising since the beginning of the year. Continued challenges in Europe and heightening tensions with Iran combined with only modest spare crude oil production capacity indicates it is likely this trend will continue.

Natural rubber makes up much of the rest (about 28 percent) of tires. In 2011, prices for this raw material climbed significantly, squeezing margins. While prices remain high, there has been some stabilization. In May 2012, Bloomberg reported that rubber fell to its lowest level in more than three months.

Despite the more recent stabilization, prices of finished goods remain on the rise. On April 1st Goodyear, CMA and Toyo Tire Canada announced price increases ranging from 3.5 to 6 percent as manufacturers continue to adjust for input volatility.

U.S. tire imports and exports growing

The U.S. has showed a trade rebound for pneumatic tires since 2010, and that sector has continued to show improvement into 2012. Census data indicates the value of national tire exports was $4.3 billion in 2010, compared to $3.8 billion in 2009. Tire imports rebounded sharply to $10.3 billion in 2010, compared to $7.8 billion a year before that. Most U.S. exports are shipped to the NAFTA region, with $1.8 billion of product having gone to Canada in 2010 and $926 million to Mexico. U.S. imports have been on the rise, as well; the country imported $2.2 billion of pneumatic tires in 2010, compared to $2.1 billion the previous year.

U.S. tire market shifting its supply center

In April 2012, Michelin announced it will invest $750 to build a new plant and expand a facility in South Carolina. With Bridgestone recently committing a $1.2 billion investment in the state and Continental Tire a $500 million investment, South Carolina is well positioned to become the leading producer and exporter in the country. It could potentially steal the title of "Tire Capital of America" from Ohio.

South Carolina is becoming the state of choice for these companies because of the state's anti-union stance, low taxes, comparatively cheaper work force and centrally location on the east coast, with access to highways and rail hubs. The state offered more than $9 million in tax incentives to Michelin, $15.5 million to Bridgestone and $31 million to Continental.

DEMAND

Demand for automobile and OTR tires increasing

The global market for tires in OEM and replacement markets is forecast to increase by 4.7 percent per year through 2015, to 3.3 billion units, which translates to a 6.5-percent increase annually over the same span, to $220 billion. As incomes increase, so does the opportunity to purchase automobiles; demand in the replacement market will also see growth as average vehicle life increases.

Optimism exists in the OTR market, with demand expected to be strong, especially for mining and heavy-construction tires. U.S. demand for OTR tires this year is expected to equal or exceed peak shipments for 2007 and could grow considerably more if the commercial housing market recovers.

In the U.S., mining tires account for approximately 10 percent of OTR tire shipments and 51 percent of the value of the OTR tire market. North American customers might have to compete with international customers for mining tires, creating a potential bidding war as supplies become limited.

Retreads a popular, cost effective alternative

The heavy-truck tire market is also experiencing high demand. With commodity prices for natural rubber and oil increasing over the past few years, there has been a shortage of affordable new tires in this market. That, combined with the shortage of casings, has resulted in many firms looking to retreading as an alternative. Retread tire prices are significantly lower than the price of new tires and can last up to 80 percent as long. However, the price of retreading is also on the rise. Last year, the average cost of a treaded 22.5-inch truck tire was $159 with customer's casings and $249 without. That amount is an increase of 16 percent from 2010.

Tire-aging legislation proposed

Many automobile manufacturers suggest replacing tires after six years, regardless of wear. Research shows that as tires age, they begin to dry out and can become dangerous. Aged tires appear to have the same properties of new manufactured tires, but rubber degrades over time. If a vehicle with such tires is travelling at high speeds on a freeway, the tread could peel off causing the vehicle to skid out of control.

In February 2012, the state of Maryland proposed a tire-aging bill. Under that legislation, a retailer would need to present date-of-manufacture information on a receipt or invoice, and shoppers buying tires more than a year old would need to sign a disclosure. This bill was struck down by strong opposition from the Rubber Manufacturers Association (RMA) and the Tire Industry Association (TIA), claiming that this would only increase bureaucratic burdens on the industry and leave it open to class-action lawsuits.

In summary, the tire industry is growing at a tremendous pace. And with increasing demand for tires in the OTR and truck tires for new and retreads, the major tire manufacturers and retreaders are getting into position to grow their market presence.

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About AccuVal
AccuVal provides a broad range of valuation, advisory and asset management solutions that contribute to growth or help ensure survival. We appraise the business enterprise and shareholder equity; bonds; intangibles and intellectual property; machinery and equipment; inventory; real estate and accounts receivables in over 100 industries worldwide. Learn more at www.accuval.net.