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Editor's Notebook

Out of Control Costs Leave Little-to-Wrangle Higher Tire Prices

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At TIA’s annual OTR Confer­ence a few weeks ago, Shawn Rasey, president of Bridge­stone Americas’ OTR unit, delivered some sobering news. Painfully sobering to thousands of tire dealers of all denominations in all places – everywhere.

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"As I speak to you this morning," Rasey said, "the price of natural rubber has risen 92% in just one year. In fact, the price of natural rubber is up almost 250% from November 2009!"

A 250% increase over 15 months.

That was when NR was running $5.20 per kilogram. Today? Who knows?

As I write this column, crude oil is trading at $106 a barrel, its highest level since 2008. That’s pushing $4 a gallon at the gas pumps, a full $1.50 a gallon more than a year ago. It’s the same story with diesel, used heavily to generate power and move raw materials and finished goods.

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That astronomical oil price is also driving up the price of synthetic rubber. And surely we will see consumers pull back again – cutting driving, cutting spending, cutting everything.

Over the past 15 months or so, the “%” mark has been the most used key on my keyboard. Just about wore the percent sign off what with so many tire price increase stories for our online news and e-newsletter.

Early on it was 3% here and 5% there twice a year. Then it was 5% there and 8% here three times a year. This most recent round of North American jolts was floating in the 8% to 12% range. Our friends in Europe and Japan have seen worse.

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And as much as we have written about tire prices, I know that tire distributors and retail and commercial dealers from the Florida Keys to Fairbanks and every place in between – in the U.S. and Canada – are equally tired of reading about them. Very, very tired.

I’m used to tire dealers complaining about anything a tiremaker does, and price hikes were just more twigs to toss on a small fire.

Until this horrible recession, that is. Until customers stopped coming in, until the outbound flow of tires slowed to a crawl. Until that little campfire turned into a four-alarm blaze.

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Now those complaints came in earnest as heartfelt concerns from dealers honestly worried about their futures. Not that consumers really know how much a tire should cost (by and large, they don’t), but high prices are scaring away the few tire buyers out there. When the consumer media got hold of the story about “huge price increases,” it only got worse.

Some dealers have asked me point blank: “What can we do about this?”

Problem is that few people can do anything about “it.” This is not the making of the tiremakers; believe me, right now they’d all love to go back to the old system of +2% on Monday and -2% on Tuesday.

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Since the early aughts, tiremakers have been eating a healthy portion of raw material cost hikes. But certainly not all.

Whether it’s been the unofficial NR “cartel” gouging for a few more pennies or the Oil Barons calling their shots or Big Steel weighing in, our industry has been mashed by multiple raw material markets.

More recently, bad weather hurt Asian NR plantation yield even as demand from India and China has increased dramatically. Oil, which had cooled off as regulatory pressure hit speculators, is riding a new wave of Middle East turmoil to new record prices.

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The only people that can do anything about “it” are the NR producers and the oil speculators, or whoever should be watch-dogging them.

Unlike the cartels and oil kings, tiremakers are not rolling around on stacks of $100 bills piled on silk-covered beds of gold. Yes, most are turning a profit, especially those with a diversified product portfolio; Bridge­stone just posted a $1 billion net profit, and Michelin $1.43 billion.

Those less diversified – like Cooper and Goodyear, for example – are scraping by. Hit by year-over-year raw material cost increases of $138 million, Cooper’s 2010 operating profit was just $140 million. Good­year posted a net loss (its sixth over the last nine years) of $216 million for 2010 on the strength of $685 million in increased raw material costs.

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Higher tire prices are a fact of life. Certainly they are not going to retreat, only go upward. If there is any solace, ongoing gasoline, clothing and food cost increases will distract consumers for a while. Sort of sad to consider that other bad pocketbook news will deflect critcism of your own.

I think you will start to see tiremakers do things to “justify” the higher prices. A little value-added here, a little benefit there could add up to something in consumers’ minds.

And I think you will see some additional retrenchment by tiremakers as they continue to struggle with unwieldy costs. Of the three legs of manufacturing – people, processes and materials – tiremakers only control so much.

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We will all get through this, of that I am convinced. Hopefully without taking on too much more water.

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