WASHINGTON—High raw material costs, high demand, low inventories, the duties against Chinese passenger tire imports: Put them together, and 2010 can be called “The Year of the Tire Price Increase.”
Tire makers have been on a price-hike campaign throughout much of 2010. And it's not over yet, with numerous increases set to take effect by the end of the year or in January 2011.
Of the several strong circumstances that are pushing tire prices higher, spiraling raw materials costs stand as the reason industry experts cite most often. Natural rubber—a critical component of radial tires—is at record price levels, for example.
Tire demand also is up, but inventories are low coming out of the recession. And the Obama administration's stiff tariffs on Chinese-made consumer tire imports, which are now entering the second year of their three-year duration, are a factor in the pricing uptick.
Since July alone, almost all tire manufacturers—and many distributors—have announced price increases, some of which are still pending.
The problem with supply shortages has been around for some time, said Curtis Schneek- loth, director of investor relations with Findlay, Ohio-based Cooper Tire & Rubber Co.
“It goes back to when demand started to increase, around the middle of 2009,” he said. “We have more supply coming online right now, but the shortages are likely to stick around until the middle of next year. We're ramping up capacity, and we've even been running on some days that are expensive for us to run.”
Roy V. Armes, Cooper chairman and CEO, commenting when the firm recently released its financial results, said Cooper is facing historically low levels of inventory, whereas high inventory levels the same time last year were available to support demand. “We are taking action to increase our production levels and intend to produce 10 percent more units in 2011 than in 2010,” he said.
Back orders for the tire industry in general began increasing in the fourth quarter of 2009, according to John Baratta, president, consumer replacement, for the U.S. and Canada Consumer Tire Sales Division of Bridgestone Americas.
“The reasons are due to a number of variables,” he said.
“In response to weakened demand in the North American market, tire manufacturers reduced production to align with the industry demand,” according to the executive. “Cash for Clunkers raised (original equipment) demand more than expected, and the tariffs on Chinese products also raised demand on domestic and other products.”
Pent-up demand in the aftermarket began to increase in the second half of 2009 and the first half of 2010, Baratta said, and demand for Bridgestone and Firestone tires exceeded the industrywide growth in demand.
Bridgestone has increased production to full capacity over the past few months and expects the level of back orders to improve through the year. Inventories will become more stable by mid-2011, according to the Bridgestone Americas executive.
The price increases have left tire dealers across the U.S. with little choice but to pass on as much of the price hikes as they can, absorb the rest, then tighten their belts to help profit margins.
“We used to get a 3- to 5-percent increase every 18 months or so,” said Mark Buenger, co-owner of O'Brien Tire & Service in Granite City, Ill. “Now it seems as if there's one of 5 percent or more every quarter.”
Jim Melvin Jr., president of Tire Pros of Rhode Island, Johnston, R.I., said the prices he is paying for tires have jumped 7 to 10 percent since January.
“We do not ever absorb price increases, we always adjust retail pricing,” Melvin said.
“That being said, our retail gross profit percentages are at an all-time low. My tire business year-to-date is up over last year in unit count, but my overall gross is 2-percent lower than last year.”
Ed Chrisman, president of Silver Creek Tire, a franchisee of Big O Tires Inc. in Reno, Nev., said price increases have averaged 5 to 7 percent for the tires he buys, including Big O private brand products.
“Gross profit has declined throughout the year,” he said.
“There has been very little room to pass on these increases to the consumer, because of the economy and new competition in the market,” Chrisman said.
“As a result, we have looked and will look at alternate suppliers where possible, to allow us to be more competitive in the marketplace.”