Tire Costs Flat but Expect Higher Prices in 2021

Tire spend is typically the second largest operating expense of a fleet and the third highest overall expense after depreciation and fuel.

“When comparing the cost of replacement tire expenses in 2020 to 2019, the cost of tires has been flat for most cars and light-duty trucks,” said Chad Christensen, strategic consultant at Element Fleet Management. “Due to COVID-19, there has been no change in tire pricing.” 

The extent of tire price variability in 2020 has been with non-standard sized tires. “Uncommon tire sizes for some vehicles has and always seems to be a challenge that leads to some price volatility,” added Mark Lange, CAFM, technical services consultant for Element Fleet Management.

As a major fleet spend category, overall replacement tire costs have remained flat during the pandemic due to lower prices for the commodities used to manufacture tires, such as crude oil and natural rubber, along with the fact that fleet vehicles are being driven fewer miles, which is extending tread wear.

 “With less movement, there has been less of a need to replace tires. In part, I think our tire partners understand some of the struggles that some industries are having and have consciously decided not to raise pricing,” said Tony Hernandez, team lead, truck maintenance for Emkay. 

The pandemic-induced economic shutdown from mid-March to mid-May created an anomaly in tire expenses due to the large volume of fleet vehicles that were idled or operating on reduced schedules.

“While tire costs remained the third highest spend category for our portfolio, tire purchases decreased significantly during the shutdown months. Since then, they but have returned to levels comparable to early Q1 2020,” said George Albright, director, fleet maintenance for Merchants Fleet.

Before going further in our analysis of replacement tire trends in 2020, it is important to distinguish the difference between tire prices and overall tire costs. In some cases, tire prices have increased in 2020, but the reduced business activity due to the pandemic has caused overall tire costs as a fleet spend category to decrease. 

Prior to the pandemic onset, the No. 1 factor influencing replacement tire prices has been the cost of raw materials, which drives national account and retail replacement tire prices. When raw material prices stay stable, tire prices are stable. In the past, volatile commodity prices, such as fluctuating crude oil prices, caused fluctuations in retail tire prices. 

The reduction in raw material cost, particularly today’s depressed prices for a barrel of crude oil have contributed significantly to flatter tire prices since oil represents approximately 60% of the cost to manufacture a tire. Confirming this assessment of the flat nature of tire costs in 2020 was Emkay. “Tire costs seem to have remained flat over the last year,” said Hernandez of Emkay. 

Not only are tire costs flat, on average, but some tire lines have also seen their prices reduced.  “Overall, tire prices have stabilized somewhat compared to last year, with some tire manufacturers reducing prices on select models and lines,” said Ryan Koenig, national service department vendor operations manager for Enterprise Fleet Management.

In the aggregate and as a percentage to total fleet cost, tire expenses have had a significant decline.

“Tire spend as a percent of overall maintenance spend fell to about 14% in 2020 as compared to about 18% in 2019.  The shift is largely attributed to the overall pandemic-related drop in fleet mileage,” said John Wuich, vice president of strategic consulting services for Donlen. 

When benchmarking tire costs by fleet, it is important to remember that tire costs will vary from company to company depending on the types of vehicles in service and the fleet application.

“For the most part, tire costs remained relatively consistent in 2020. In fact, with the cost of raw materials dropping slightly and crude oil holding steady at near record lows, several manufacturers actually reduced the price of some tire models,” said Chris Foster, manager, truck & equipment maintenance for ARI.

One factor holding down tire costs is that more fleets are sourcing non-traditional replacement tires. Tier 3 and 4 tires continue to grow in popularity, providing a pricing challenge for name brands. In earlier years, higher prices prompted some fleets to expand the purchase of non-brand replacement tires. In reaction, there has been an increased focus on competitive pricing among some name brand tire models and sizes.

As a result, OEMs selling brand name tires are narrowing the price gap. Name-brand tire prices have become even more competitive with the less familiar brand tires that have been usually at  a lower cost point. The net result is that this has given more opportunity to non-branded manufacturers by allowing fleet operations to have more sourcing options.

Multiplicity of Tire Sizes

A perennial factor exerting upward pressure on replacement tire costs is the adoption of larger diameter tires and unique tire sizes. The increase in OEM automobile wheel diameters has driven up the price of fleet replacement tires, primarily because the larger the tire, the greater the manufacturing expense.

“Increasing wheel diameters over the years has greatly influenced the price of replacement tires. It is a best practice to compare the cost of tires when selecting tire options for vehicles,” said Jamie Grams, national service department manager of Enterprise Fleet Management. 

The combination of larger wheel diameters and shorter sidewalls increases tire prices due to the advanced engineering required for the tire construction. The greater variety of sizes has forced distributors and retailers to manage more inventory, which drives up their inventory holding costs.

“The recent development of all-weather tires is a benefit to fleets located in regions that experience heavy snowfall or that require snow rated tires. Unlike all-season tires or snow tires, all-weather tires are snow rated tires that can be driven year-round. This eliminates the need to purchase and store a second set of tires, which prevents downtime resulting from seasonal tire change overs,” said Grams of Enterprise Fleet Management. 

Consumer preference is clearly trending toward larger wheel sizes and automakers are responding to that demand accordingly. However, the increased use of larger diameter tires on a growing number of models has exerted upward pressure on fleet tire costs.

Forecast of Tire Prices in 2021

Predicting future tire prices is very difficult due to the many variables that influence tire manufacturing, distribution, and retail pricing. 

According to one of the tire industry’s trade magazines, Tire Review, “the weakened economy, lack of consumer confidence and high global unemployment rates have resulted in a plunge in auto sales and aftermarket tire sales.”

In addition, Tire Review reported: “In the supply chain, consumption of tire materials has dropped in line with tire manufacturing, creating declining prices for natural and synthetic rubber and other key commodities. Changing consumer patterns, such as working from home and e-commerce, are likely to have a lasting effect on tire industry practices.”

The price of commodities has a direct relationship to the ultimate retail price of a tire. For instance, since oil represents a large percentage of the raw materials used to manufacture tires, the forecast by some analysts for flat oil prices in the future is a positive sign for future fleet expenditures. However, in a Sept. 1, 2020 study, Goldman Sachs reported that other analysts expect Brent crude to increase to $65 per barrel from today’s $45 per barrel in the third quarter of 2021. 

Nevertheless, the price of commodities, such as oil, rubber, and steel, which are three key ingredients needed to manufacture tires, are unpredictable cost variables in determining tire prices. Based on past experience, commodity prices can change quickly given the volatile nature of the commodity markets.

So, what is the fleet industry’s forecast of the cost of replacement tires and retreads and their impact on fleets in 2020-2021 calendar-years?

“There is concern about increases in raw material costs, especially oil, which would have a material impact on the cost of tires,” said Lange of Element Fleet Management.

There may be credence behind these concerns as recent price trends point to higher tire costs in the 2021 calendar-year due to recent indications of upward pressure on commodity prices. “Overall, per tire cost has increased across multiple brands, with all manufacturers noting increases in raw materials, labor, and distribution costs,” said Albright of Merchants Fleet.

Others likewise forecast that tire prices will trend upward in 2021 as demonstrated by the recent pricing announcements from several large tire OEMs. 

“Manufacturers, such as Michelin, Goodyear, and Pirelli, have increased replacement tire pricing thus far in 2020,” said Mark Ackerman, director, maintenance and repair for LeasePlan USA.

Another factor putting upward pressure on future tire prices is the growing trend by fleets to upgrade tires during the new-vehicle acquisition process.

“We are seeing an increase in tires being upgraded during the factory order process, as well as immediately following delivery. In particular with gas & oil, construction, and engineering fleets.  Standard issues are being replaced early with more aggressive treads,” said Wuich of Donlen. 

On the flip side, there are other industry trends that promise to lengthen the interval between ordering replacement tires. “Changing consumer habits, such as working from home and e-commerce, are likely to have a big effect on pricing, as well as replacement intervals,” said Ackerman of LeasePlan USA.

Since tire prices are dynamic and are influenced by a variety of variables, it is difficult to reach a consensus on a future forecast on tire prices. 

One camp focuses on commodity prices and their unpredictability. “The expectation is that overall tire cost per tire will increase across most manufacturers due to continued pressures on the increases in raw materials, labor, and distribution costs,” said Albright of Merchants Fleet.

Another factor cited has been the growth in last-mile delivery fleets, which is the fastest growing fleet segment operating in an environment with a high number of stop-and-go miles per unit. “Increases in urban driving by last-mile fleets will continue to fuel demand for cargo van and step van tires,” added Albright of Merchants Fleet. “We have observed increased demand for durability among tires, especially with cargo vans and step vans. Urban driving in last-mile fleets have driven the need for higher mileage tires with lower to mid-range price points.” 

Market uncertainty and its impact on the supply chain is another unknown quantity that is difficult to forecast.

“Looking ahead, with the market uncertainty caused by the pandemic and other factors, it is somewhat challenging to accurately forecast long-term costs with much confidence. For example, one factor we’re monitoring closely is potential supply constraints on some tire models due to disruptions in the manufacturers’ production schedules during the pandemic,” said Foster of ARI. “Additionally, we’re beginning to see a few manufacturers announce plans to increase prices slightly as we head into 2021 due to higher than anticipated operating costs. It appears likely that tire costs will be slightly higher across the board in 2021.” 

The ultimate outcome of the pandemic and the strength of the economic recovery are driving many predictions on future pricing.

“During this period of economic recovery, it is unlikely that tire prices will significantly increase as demand and miles driven will be limited,” said Erin Mills, national service department manager for Enterprise Fleet Management.

The time to watch is April 2021, which is when tire OEMs have traditionally announced new pricing.

“Until there is a turnaround, cost may remain the same for potentially the first half of the year. With less purchases being done; we do expect the cost to increase either in April or September of next year.  Those are the two times where tire manufacturers have historically reviewed their pricing and made changes,” said Troy Fleener, team lead, maintenance for Emkay.

One consequence of the pandemic has been an increased interest in retreads by commercial fleets. 

“Most clients are looking to cut costs at this time. Retreads on the truck side were not highly sought after from certain clients and I do think now they are considering them as an option,” said Fleener.

During the economic shutdown, many fleet vehicles were parked for extended periods by company employees. One consequence of this prolonged inactivity has been the emergence of flat spotting, which occurs when a tire has been stationary under a vehicle load for an extended period. As a result, the tire develops a flat spot in the area where it is in contact with the ground. “This is an issue that we have seen with some of our client’s tires. We have been proactively working with our customers to remind them to move their vehicles at least once a month to avoid this,” said Hernandez of Emkay.