Big Tires: Acting Like a Global Fed

On Monday, The Wall Street Journal (registration required) printed a great article on the supply and demand implications of scarcity in the giant tire market. These are the types of rubber monsters used in giant earthmoving and mining equipment. As further background on them, you can read more in a spend matters entry from earlier this year. The Journal piece describes how the lack of available supply to meet demand is putting the brakes on global production of such areas as iron ore and steel, driving up prices, which in turn has had a moderating effect on the stratospheric manufacturing and building growth rates of countries like China. It cites the case of Terex, a heavy equipment producer which competes with companies like Caterpillar and Komatsu. Terex, like its rivals, is doing extremely well in the financial markets, but could be doing even better if it could meet customer demand. But it can't because of one link in its supply chain -- those giant tires.

Acting as a type of global checks and balance on growth, the lack of available tire capacity, one could argue, is as close as the overall manufacturing economy can come to the equivalent of a rising global Federal funds rate, which discourages potentially risky investment given the relative high costs of doing so. As the article notes, "higher costs can put a break on industries that might otherwise overbuild. With growing nations like China showing little sign of slowing demand growth for the world's commodities, companies looking to expand can't risk adding capacity that could prove costly to operate ... In the past ... equipment makers often made the mistake of rushing to add capacity -- helping fuel the boom-bust cycle. This time, however, with a bottleneck created by the tire shortage, there is no incentive to overexpand." The marvelous little article concludes by noting another "big change" Terex is seeing in the world market. This is "the shift away from a cycle overwhelmingly controlled by the business climate in North America and Europe to one controlled by rapidly industrializing nations such as China ... which has turned [its] business into a growth industry."

Perhaps in 2015, a team of Chinese economists will study how the moderating impact of a lack of available tire capacity after the start of the new millennia actually led to a more sustainable, long-term boom in the country's manufacturing and industrial sectors. It's my guess that supply chain hiccups like this can have a far greater impact than a government controlled tightening of monetary policy. I guess that even in communist China, the invisible hand still knows how to work its magic.

Jason Busch

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