Understanding price increases in the tire industry – Part 4
In the third installment of this series, we discussed how US tariffs on imports of Chinese-made tires has had a dramatic affect on the price of tires. While this policy has clearly reduced the number of tires being imported from China, it has subsequently created new opportunities for several other countries to fill the void and export tires to the US. As a result, this has weakened competition and contributed to higher tire prices.
As anyone who has purchased tires recently can confirm, the prices have skyrocketed. Over the last three years tire prices have increased an average of 70%. According to Tire Review, “we are seeing twice-annual tire price increases, and these are ranging from 5% to 12%.” In other words a tire that was $100 at the beginning of 2009 is probably listed around $170 today. From 2005 to today “the same tire costs about 87 percent more.”
Surge in Global Population and Emerging Markets
Just a few months ago the world population surpassed “7 billion” people. Furthermore, it is expected that “the world’s population will increase by 40% to 9.1 billion by 2050, but the growth will be in the developing world.” Estimates show that “70% of world growth over the next few years will come from emerging markets, with China and India accounting for 40% of that growth.” As the population rates soar so too does the economic infrastructure in these developing countries as jobs are created and a stronger middle class materializes. This leads to economic stability, economic growth, and increased spending power. As a result demand increases for items like automobiles, petroleum, rubber, etc.
According to PwC , “analysis reveals that the E7 emerging economies (China, India, Brazil, Russia, Mexico, Indonesia and Turkey) are set to overtake the G7 economies (US, Japan, Germany, UK, France, Italy and Canada) before 2020.” However, Ernst and Young aggressively reports “the International Monetary Fund (IMF) forecasts that the total GDP (Gross Domestic Product) of emerging markets could overtake that of the developed economies as early as 2014.”
Rise in World Auto Sales
Automobile sales in emerging markets are exploding in relation to the global population growth. In China alone, “sales of passenger vehicles rose 12.5% last month” (April 2012). An article in Automotive World reports “Brazil’s total vehicle market has continued to grow since 2006.” It is expected to accelerate in growth through 2015. Along with increased vehicle sales comes the demand for automotive parts and accessories.
Saul Ludwig of Modern Tire Dealer reports “strong new car sales lead to better replacement tire demand.” Demand for tires will be increasing because of the “rise in world auto sales. Reports estimated sales increased 8 percent to 68.5 million units in 2010, and 7.2 percent to 73.4 million units in 2011. Tire makers are saying that they have to raise prices because of the higher costs for them.”
The fastest growing car markets are China, Japan, and Brazil (along with the US). According to an article in Automotive Fleet “Increased global demand for tires is being fueled by the increasing volume of vehicles produced in China, South Korea, and India. There was a 6-percent increase in world auto sales in 2011, which was on top of a 10-percent increase in 2010. This year-over-year growth has led to a sharp increase in tire demand, with raw material suppliers struggling to keep pace. Global rubber production is forecasted to continue to lag behind OEM demand, which will add upward pressure on tire prices. A silver lining is ongoing improvement in tire quality, which has resulted in longer wear life. Tire life has been extended by 10 percent during the past 10 years, helping offset some of the recent price increases.”
As we discussed in the first segment of this series, there has been a global shortage in natural rubber. Thus, a classic supply and demand situation has developed. There is a global increase in demand for tires and a current shortage in raw material supplies. The simple laws of economics (supply and demand) tell us that tire prices will increase as countries are willing to pay more for inventory. It’s difficult to predict when the tire industry will stabilize. All of these global forces are directly impacting tire prices at retailers. We will continue to monitor the situation and keep you informed. As always we invite your thoughts and comments.Top