Rising Rubber Costs, Decreased Demand Squeeze Tire Industry

Jan. 1, 2020
CHICAGO - For tire dealers, 2006 has not been a memorable year. Already competing day-to-day with each other, the industry is facing decreasing demand and a drop in supply, most notably from Southeast Asia ...
INDUSTRY OUTLOOKRising Rubber Costs, Decreased Demand Squeeze Tire Industry CHICAGO - For tire dealers, 2006 has not been a memorable year. Already competing day-to-day with each other, the industry is facing decreasing demand and a drop in supply, most notably from Southeast Asia.  Already this year, several major tire makers, including Michelin SA, Goodyear Tire and Rubber Co. and Bridgestone Corp., have cut back profitability forecasts in the face of rising rubber, crude oil, energy and other material costs. Natural rubber prices have increased by 50 percent year-over-year in 2006, with a new 20-year high reached last June. The costs of other raw materials, such as synthetic rubber and carbon black, have gone up as well.  Caught in a squeeze The Rubber Manufacturers Association (RMA) expects a 2.5 percent decrease in overall U.S. tire demand for 2006 over 2005. Several tire manufacturers have cited a limited ability to recoup the rising costs by passing them on to customers, fearing it would further dampen demand. Forecast Drop In Tire Demand 
(2006 over 2005)Tire Industry SectorOEM DemandAftermarket DemandPassenger Car-2.0%-2.3%Light Truck-5.6%-7.6%Commercial Trucks-5.7%-2.0%(Table source: Rubber Manufacturers Association)

In addition, RMA says it will not be easy to raise prices in the replacement market again after the recent hikes earlier this year and the severe price competition.

The Economist Intelligence Unit (EIU), the business information arm for The Economist magazine, recently published a study and analysis regarding the impacts of rising rubber and other commodity prices. In just the last two years alone, the Tire Raw Materials Price Index has doubled, continuing a trend over the past decade. 

Tire Raw Materials Price Index

(Source: idorfman.com)

The EIU study cited the primary factors causing the increase in raw rubber prices: a strong industrial demand from China, and a deterioration of the supply outlook, particularly among Southeast Asian producers - a consequence of severe weather within the region. 

"It will take over a year for the rubber market to return to balance, and consequently prices will remain well supported, easing off only gently in 2007-08," says the EIU. The study estimates rubber costs will rise by 27 percent in 2006, and it forecasts a decrease of just 2 percent in 2007. It is interesting to note that the study showed that the increase in rubber prices matches that for crude oil this year.

Thinking beyond the horizon According to the International Rubber Study Group (IRSG), rising material costs and expected rubber shortages over the next five years are driving many tire manufacturers' efforts toward sustainable manufacturing. Manufacturers are working to develop product innovations that reduce dependency on expensive raw materials, while rubber producers are maximizing output from existing trees. Despite planting new rubber trees, it takes six years of growth before they can be tapped. Thus, there will be a lag as producers struggle to keep pace with increasing world demand. Few manufacturers have resolutions for the short term. A few tire companies, such as Japan-based Yokohama, have announced a new round of price increases set for October. The positive performance of the Japanese yen against other currencies offers some hedging relief, just as it has improved Japanese automakers' bottom lines this year. With that unique advantage, any short-term loss in demand is partly offset by the currency windfall. The IRSG also notes that DuPont expects to begin production in 2007 of high-performance thermoplastic resins and elastomer products made from bio-based material. The products, targeted for automotive, electrical, electronic and other industrial markets, will be made from corn sugar rather than petroleum. As an added benefit, DuPont's new bio-based materials require approximately 40 percent less energy to manufacture than their petrochemical-based counterpart.  New products made from bio-based materials will contribute to the company's goal to drive 25 percent of its revenue from renewable resources by 2010. "When these new products are commercialized, we will be able to offer our customers the benefits of renewably sourced materials and a reduced dependence on petrochemical sourcing," says Keith Smith, vice president and general manager of DuPont Engineering Polymers.  Other tire manufacturers are looking to integrate vertically by buying the sources from where their raw materials originate. For example, Japan-based Bridgestone Corp. purchased an Indonesian rubber plantation last year and is assisting farmers in other parts of the world to plant more rubber trees. The company also has been investing in facilities that make strategic raw materials such as carbon black. While automakers and aftermarket manufacturers are also feeling the impact of rubber prices, it is the tire dealers who are in the direct line of fire. Escalating prices have impacted them for years. This year has been especially tough because it coincided with rapidly rising crude oil prices. For many, the effect has been a double-whammy - consumer spending has been squeezed, and like the auto repair business, discretionary spending on tires has taken a back seat to paying for gas and home heating. Dealers have been able to do little other than batten down the hatches and ride out this storm. Should the IRS forecasts hold true and rubber prices drop over 2007 and 2008, it will bring welcome relief. If domestic consumer spending ramps up, the news may be even better.(Sources: RMA, IRSG, The Economist, idorfman.com)

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