While I do my best to come up with new topics each month, there are certain subjects that cannot be covered enough. It hasn't been that long since I addressed the latest round of price increases for truck tires and retreads, but recent events indicate that there may be no end in sight. Heavy rainfall in the major natural rubber-producing countries of Indonesia, Malaysia, Thailand and Vietnam has damaged a number of rubber plantations. Recent estimates by the Dept. of Disaster Prevention and Mitigation in Thailand indicated that about 4.8% of agricultural land (about 1.9 million acres) in that country alone was damaged by flooding. Since the news in the other countries isn't any better, the outlook for 2011 is bleak.
Making matters worse is the fact that the apparent global recovery has increased the worldwide demand for natural rubber by the tire companies. It's reached the stage where current inventories can only account for about 70 days of demand, which is the lowest level in 10 years. Since natural rubber is not like oil (you can't just pump more out of the ground), production cannot be easily increased when most of the world's supply is dependent on small farmers in Southeast Asia. And even though the long-term prospects for rubber tree production appear to be infinite, unlike oil reserves that will eventually run out, they remain an agricultural product that is subject to all the accompanying variables.
Like any supply-and-demand model, prices go up when demand increases. During the recession at the beginning of 2009, for example, natural rubber prices were around $0.70/lb. A year later, the price doubled to $1.40/lb. By the end of 2010, the price had risen to over $1.90/lb. A typical truck tire has about 30 lbs. of natural rubber, so if you do the math, that's a $36 increase per tire in the price of raw material for one tire over the past two years. While I am hardly qualified as an expert on natural rubber futures, I don't believe the situation is going to improve over the next 12 months so fleets must brace themselves for more increases in truck tire prices.
In my opinion, all of this is adding up to major changes in how fleets deal with truck tire maintenance, service, repair and retreading. Whereas maintenance departments may have been reluctant to approve section repairs in the past, they may have to find ways to keep those tires in service so the casing asset is not lost. And any fleet that still believes it can operate without a retread program is destined to experience higher tire costs per mile. Just do the math. An 8% increase on a retread costing $150 is $12. Apply the same 8% price increase to a new tire costing $350 and the fleet pays an additional $28 per tire. That $16 per tire difference is only going to widen as the cycle continues, which means the economic advantages of retreads have never looked better.
I honestly don't think truck tire prices will fall as long as natural rubber remains part of the equation. There are just too many uncontrollable factors that impact the already thin line between supply and demand. As it stands right now, one of the main reasons for higher prices is the weather in Southeast Asia. Forecasters are hopeful that the rains will subside so production can return to normal levels and begin to restore dwindling inventories. Let's hope they're right.
Kevin Rohlwing can be reached at [email protected]
