Tire prices have taken a bounce as a result of rising raw material costs. Goodyear Tire & Rubber Co. was the first to announce price increases of about 8% effective Feb. 1.
Richard Kramer, chairman and CEO, pointed to “significant volatility in our key commodity costs, including natural rubber prices and since our last earnings call there’s been a swing of a low of 67 cents-per-pound to a peak of $1.04 per pound as recently as last week, an increase of an astounding 55%”.
The raw material cost story is about more than just natural rubber, with challenges coming in a broad cross section of commodities. Prices of key commodities such as butadiene and carbon black have also risen to 52-week highs in recent weeks. Analyst expect raw material costs to remain at heightened levels through 2017.
Laura Thompson, CFO said, “Even since the Detroit Auto Show, we’ve gone up over $300 million in raw material cost increases just in the last three weeks. So it’s quite volatile.”
Another complexity is that there’s a lag of when raw material prices hit a tire maker’s profit and loss statement. Kramer said there can easily be a six-month lag from when the raw rubber is purchased in Southeast Asia to when a tire is produced and sold. It spends time on a ship and on a dock before it ever enters Goodyear’s inventory, and then production time is another extension. Tires in Europe and North America experience the longest delays, while a price hike hits Asia much faster.
Kramer said Goodyear anticipates more than a $1 billion increase in raw material prices in 2017.
“Clearly the raw material inputs that we’ve got have been very volatile and I would even say unpredictable.” Another mid-year price increase seems likely.
Tire management can yield significant savings for fleets. Often overlooked, maintaining proper air pressures and regular rotation can extend tire life by 30% or more. Properly inflated tires also save fuel. Every 1 psi drop in the average tire pressure can lower fuel mileage by about 0.4%.