By Mike Antich
The prices of replacement tires have increased an average 6-9 percent per year for fleets.
"In the past four years, the cost to replace four tires has risen about $150," said Steven Anderson, senior sourcing specialist/fleet management for Sentry Insurance. During this period, there have been multiple price increases from all major tire OEMs, especially for truck and commercial tires.
"Tire prices continue to rise, so managing that aspect of our fleet is critical," said Mike Speer, senior director of facilities and fleet for Schwan's Home Service, Inc. "We are managing these costs through negotiations with tire suppliers, a proper tire inflation campaign, and testing different tires to determine the best option for our fleet."
During 2011, tire prices increased at a higher rate than inflation, particularly for commercial trucks. Despite much higher retail tire prices, tire pricing for fleets have risen at a lower rate because of pre-existing fleet account pricing agreements. When tire pricing does change - typically on an annual basis - adjustments are made, but not at the level seen on the retail side. However, it would be shortsighted to believe fleet vendors will indefinitely absorb tire cost increases without fully passing them on to fleet customers.
"The tire companies will take a tremendous amount of grief from their dealers if they don't hike prices to their fleet and OE customers, so I can't imagine them not raising prices," said Greg Smith, publisher of Modern Tire Dealer (MTD) magazine.
Commodity Prices Dictate Tire Prices
One reason for the series of price hikes is due to increases in the cost of raw materials, especially the high cost of oil, a primary ingredient to manufacture tires. In addition, the world's rubber supply will likely become more constrained due to increased global demand, putting upward pressure on prices.
The increased cost of raw materials impacts not only tire OEMs, but also the tire retreading industry.
"Retreaders are finding tread rubber costs rising, but the amount of tread rubber applied in retreading is much smaller than that used in the manufacture of a new tire, regardless of the size," said Harvey Brodsky, managing director for the Retread Tire Association (RTA).
In addition, longer in-service periods for fleet vehicles are resulting in additional tire wear-and-tear. This extended vehicle utilization exposes fleets to additional tire costs over the lifecycle of a vehicle. Another reason for price increases is the ongoing proliferation to ever-larger tire diameters by new-vehicle manufacturers. The trend to larger diameter tires is broadbased, occurring on many models in the compact, intermediate, and minivan segments, which have increased the manufacturing costs.
Supply and demand for raw materials is also influenced by the overall global market for tires. For example, there are more than 1 billion tires manufactured annually in 450 tire factories around the world. Almost 60 percent of the world's rubber is consumed by the global tire industry, with the remainder purchased by the general rubber products sector.
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.
