2009: What the year ahead looks like for the tire industry
by Irwin Rapoport

It is no surprise that the economic downturn in the United States is having a significant impact on tire production. It has resulted in reduced production and sales, plant closures, plants being placed on closure alert, worker layoffs and reduced shifts. At the same time, due to reductions in the price of petroleum, natural gas and steel, there has been a drop in the cost of raw materials.

There are essentially two types of tire sales – those sold as original equipment (OE) for newly manufactured vehicles and those sold as replacement tires for vehicles ranging from passenger-class to heavy-duty commercial and industrial classes. For all classes, sales of OE and replacement tires are forecasted to continue to decline in 2009 as they did in 2008, with expected declines or long-term lower sales for the foreseeable future until the economy picks up to the point where the pre-decline sales figures are re-attainted.

“The 2009 projections for the United States tire market are for sales to continue to decline,” said Kevin Rohlwing, senior vice president of training with the Tire Industry Association (TIA). “Not long ago, the Rubber Manufacturing Association released a press release looking at a drop of 6 percent for 2008 and probably another drop for 2009.”

The numbers are bleak. Rohlwing said that OE sales for passenger tires are expected to have declined by 14 percent for 2008 with another 3 percent decline in 2009, while replacement tires sales will decline by 2.7 percent in 2008, and no growth is expected in 2009.

“The forecast for the replacement light truck market is even worse,” he said. “Projections are for a 13 percent decline in 2008 and another 4 percent in 2009. For commercial tires, the expected decrease is 7 percent in 2009 and then another decrease of 300,000 units in 2009. All of the projections for tire usage are going down with the corresponding number of miles driven.”

In terms of actual units, Rohlwing notes that updated projections have passenger replacement tires declining from 208 million to under 200 million units sold, with light truck tires declining from 35 million to 29 million units. Commercial tires, ranging from medium truck and other classes, are expected to decline from 16 million to 15.4 million units.

Rohlwing stresses that tires sales are tied to the overall economy.

“If the big public works bills go through and we start rebuilding America,” he said, “that will be good for the entire tire business, because you are going to have more people driving to jobs and more trucks transporting materials to job sites.”

A key goal for President Barack Obama is to create 3 million new jobs – a goal that ties in well with improving demand for tires.

The majority of tires used by Americans are produced domestically by domestic and foreign manufacturers. Goodyear, Michelin and Bridgestone have approximately two-thirds of the market share. United States tire production is basically centered in the southeastern states, with production – based on February 2008 figures – at around 450,000 units per day. The top 10 production states (in order) are Oklahoma, North Carolina, Tennessee, South Carolina, Alabama, Illinois, Mississippi, Georgia, Virginia and Pennsylvania. In terms of production, Oklahoma was producing 99,000 tires daily, with Alabama producing 72,000 daily.

While the TIA does not track sales of used tires, Rohlwing said that such sales are likely to have a greater impact in economically depressed areas.

“Used tires have gotten a lot of bad publicity over the last few years, so that consumers are on the fence,” he said, “and are probably going to lean to more expensive brands than a brand they never heard of.”

The key factors concerning used tires are tread depth and age. Rohlwing said that media reports concerning the physical age of tires have raised safety concerns among consumers. He adds that in some cases, vendors selling used tires do not sell quality products and that this is a concern for tire manufacturers.

“The unfortunate thing is that if you have a bad tire or one that should have never been sold to begin with, it definitely adds some risk to the driver,” he said. “It has been on the radar of all the tire manufacturers, because if their tire is sold as a used tire, they wind up getting liability for it even if somebody else threw it away.”

Ongoing declines in automobile production are also impacting sales. Projected OE sales for 2008 – 46 million units – may decline to 39 million units. This has led to plant closings and reduced shifts, as plants adjust to reduced demand.

“This could become significant if the decline continues,” said Rohlwing.

On the recycling front, fewer tires being produced translates into a decline in the number of units requiring processing.

The primary ingredients required for tire production are natural rubber, petroleum and steel. In some cases, polyester is added to the mixtures. The percentages of materials vary by manufacturer.

Oil prices, said Rohlwing, dictate the cost of all synthetic rubber and chemicals that are needed. Oil prices peaked in 2008 at nearly $150 a barrel, but have since declined to below $40. While the drop has helped manufacturers, prices have not declined for diesel fuel, the primary fuel used by railways and trucking companies for their vehicles – methods of transportation used to transport tires from factories.

“Diesel fuel is still very high, relative to gasoline,” said Rohlwing. “With diesel prices up, tire companies are trucking companies, just as much as they are tire companies. Any gains that manufacturers are going to get on the raw materials side will probably just offset rises in insurance, health care, wages and everything else that seems to be on the rise, so I don’t really think it gives them a break.”

A tire market recovery will require unemployment to be halted and reversed, otherwise Department of Energy projections for a decline in miles driven will continue.

“We don’t know where the bottom is yet,” said Rohlwing, adding that when the market does reverse itself, manufacturers will be able to step up production easily. “If they can manage with a smaller workforce and produce more, than they’ll try to do that first. Companies are becoming more efficient while they are waiting for things to recover.”

Becoming more efficient is exactly what Bridgestone Americas is doing, said Mike Gorey, president of Bridgestone’s United States and Canada Consumer Tires Sales Division.

“We are looking for a steady state in the industry and we expect to see that steady state no later than the second quarter of 2009,” he said. “We are looking for efficiencies where we can. We recently went through an evaluation of our salaried positions and had to make some layoffs. We did put our LaVergna, Tennessee passenger tire plant on notice of potential closure in December and we are evaluating our overall capacity and future capacity requirements. We’ve also had to take some volumes out of the other plants to adjust our inventories.”

Gorey said that a comprehensive federal economic stimulus package and strategy will be necessary to ensure a long-term economic rebound and that initial tire market rebounds will vary throughout the year.

“We see miles driven down in the 4 to 5 percent range,” he said. “We believe the higher cost in gasoline may have resulted in consumers delaying the replacement of tires. We are beginning to see a bit more of bounce back in December and January. But it won’t be a bounce all the way back and we expect that we’ll see the double-digit declines year-over-year in 2009.”

He also believes that world commodity prices will continue to be soft in 2009.

“How much that is going to be worth to us, I cannot tell you,” said Gorey. “We’ll be managing it as best we can. Like all the other companies, we are hunkered down and we’re doing the right things to weather the storm and position ourselves to be a stronger competitor when we come out of this down cycle.”