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Tires still grow on trees

It seems like every time I open a trade publication, someone is raising tire prices by another 3% or 5%.

It seems like every time I open a trade publication, someone is raising tire prices by another 3% or 5%. Several companies have announced increases in the past few months and those that haven't will likely follow suit before the end of the year. The press releases typically point to the rising costs for raw materials and energy as the reasons for the change in pricing.

With the price of gasoline and diesel fuel continuing to rise, everyone can understand the energy part of that equation. My local utility is adding 70% to our electric and natural gas bill because they've convinced the politicians that they're selling us power at below “market rates.” You'd think their stock must be worthless if they need that type of increase to make a profit, but apparently stock price has nothing to do with the bottom line in the utility industry. Maybe they're jealous of the record earnings the oil companies are currently reporting and don't want to miss out on the gold rush. Regardless, nobody can escape higher energy costs.

Radial truck tires are basically comprised of three raw materials: natural rubber (NR); synthetic rubber (SR); and steel. Of the three, steel is the least volatile market and prices have actually fallen since January of 2005. The same cannot be said for NR and SR.

Natural rubber is totally dependent on rubber trees and, like other agricultural commodities, it relies on a network of farmers, which, according to a March 2002 report from the Food and Agriculture Organization of the United Nations (FAO), totals 30-million small farmers worldwide. The same FAO report estimated that 70% of the world's NR production comes from Thailand, Indonesia and Malaysia. So any type of major environmental disaster in Southeast Asia could have a devastating effect on a tire industry that consumes 75% of the world's natural rubber supply.

One tire manufacturer recently announced that its costs for natural rubber have doubled in the past 18 months. While I am not a global NR market analyst, I'm guessing that a drought in 2005 in Southeast Asia had something to with it.

The SR market is also volatile, however, since oil is the key component in synthetic rubber compounds. Considering that about 60% of the world's oil reserves are in the Middle East, the political unrest in there is not going to result in falling prices any time soon. And for a few months last year, SR was actually more expensive than NR — an extremely rare occurrence.

Even a significant price difference between SR and NR would probably not convince tire manufacturers to alter the proportion of each used in their products. By balancing the best properties of each, modern truck tires can achieve maximum performance and service. It becomes a question of sacrificing one quality to gain another: A tire may wear better but grip less, or grip better but deliver fewer miles per 32nd of tread. Since changing the percentage of SR or NR won't result in a price decrease, sacrifice is not the answer.

Ultimately, tire prices are at the mercy of Mother Nature and politically unstable geographical regions thousands of miles a way. Chaos theorists say the balance of nature is so fragile that a butterfly in Brazil can set off a tornado in Texas by flapping its wings. If that's the case in the tire industry, I'd hate to see the size of that butterfly.

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