TORRANCE, CA - Replacement tires have been increasing on average 6-9 percent per year for public sector fleets. Typically, tire costs are included as a subset of parts (the tire itself) and maintenance (the labor to replace tires). Over the past five years, fleet managers have witnessed multiple price increases from all major tire OEMs, especially for truck and commercial tires.
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.
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 become more constrained due to increased global demand, putting upward pressure on prices.
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 broad-based, occurring on many models in the compact, intermediate, and minivan segments.
An overlooked factor impacting replacement tires is supply and demand, especially in relation to the number of new vehicles sold. During the recession, when vehicle manufacturers reduced production, so did tire companies - with some even closing tire plants. As demand started to increase, the capacity to produce tires was stretched. Industry observers cite the cyclicality of the automotive industry and believe this will be a short-term pricing respite.
Increased global demand for tires is being fueled by the increasing volume of vehicles produced in China, South Korea, and India. The forecast is for a 6-percent rise in world auto sales by the end of calendar-year 2011, which will be on top of an earlier 10-percent increase in 2010. This year-over-year growth has led to a sharp increase in tire demand. Industry forecasts are that global rubber production will continue to lag behind OEM demand, which will add additional 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 price increases.
The multiple tire price increases occurring throughout 2011 point to more increases on the horizon. Most foresee tire price hikes continuing for the balance of this calendar-year with expectations of another round of pricing increases during calendar-year 2012.
In the past, national account tire manufacturers have done their best to shield the fleet industry from price increases by holding prices for a 12-month period. Although financially able to absorb the cost "inflation" of producing tires in the past, there is concern that vendors will no longer be able to continue to absorb these increases. Industry consensus is that prices will increase, but the degree of increase will be heavily influenced by the future cost of oil and the vitality of the overall national economy.
By Mike Antich
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