What’s going on with the price of tires? What are the reasons behind such increases?

Beginning of 2017, most tire manufacturers announced a price increase. And it’s not likely to be the last. For those that have not yet done so, it’s just a matter of time…. Certain brands will suffer more than others…

What’s the cause of such increase?

Since last August, we’ve noticed an upward trend of natural rubber (NR) value on the markets. Since the historic low of December 2015, its value has doubled.

All other products used in the manufacture of rubber have increased as well, but to a lesser extent. For example, oils, we could easily imagine a similar variation to that of petroleum which increased by 40% in just 12 months.

 

Which brands will be most affected and how?

This is an adaptation of an article published by David Shaw on December 12th 2016 available at: https://www.linkedin.com/pulse/whats-going-tire-pricing-david-shaw

 

Michelin is the only major manufacturer who shared its price structure. Thereafter, it has been possible to compare it to Indian and Chinese products (see right side graphs). The different shades of purple represent various materials, orange: labor, yellow: research & development, green: sales and black stands for ‘’other’’. Blue and red are pertaining to capital expenditure and depreciation. We easily notice that for major brands (identified by ‘’Developed’’), the portion formed by the different shades of purple represents only 30% of their costs while tires manufactured in India would turn around 60% and a little bit more for Chinese tires.

These graphs were appropriate in 2012. Since then, the price of raw material have resulted in dropping down these proportions by 10% according to a Tire Industry Research study. In other words, the price increase of raw material currently observed, will hit particularly hard on tires manufactured in China and India compared to major brands. For each 20% raw materials price increase, major brands will increase their cost by 4% when Chinese brands for example, would increase by around 10% and this appears to be the current trend.

 

Daniel Marleau – CEO LanOTR