Car Tires: Ready to Burst?

Spend Matters welcomes a guest post from Robert Miles, at Mintec Ltd.

With an annual turnover well in excess of $130bn, the global tire industry is huge. Close to a million people are employed directly in making and selling tires around the world. And millions more earn a living indirectly from the tire industry, as practically everything these days is transported by car, truck, or plane at some stage in the supply chain.

Over 1bn tires are manufactured annually and the majority of the world's automotive tires are now made in China. With roughly a quarter of the world's rubber consumption, China is by far the planet's largest consumer of rubber. In terms of total crude oil consumption, it is currently second only to the US.

The manufacturer location makes sense, as around half of the rubber in tires is made from natural rubber, obtained predominantly from rubber plantations largely in Southeast Asia, or synthetic rubber, made largely from globally sourced crude oil.

In terms of USD the price of a standard automotive tyre, based on its raw materials of manufacture, rubber, steel, nylon and a filler, is currently showing the following trend:

With regards to raw materials, when looking at a Chinese tire, we can see the price should theoretically be down by almost a third (32%) in the last year or so, with:

Rubber: USD 3151/tonne (down 35% on mid 2011)
Steel: USD 634/tonne (down 10.5% on mid 2011)
Nylon: USD 4459/tonne (down 16% on mid 2011)
Filler: USD 978/tonne (unchanged on mid 2011)

The world financial crisis caused demand for rubber to decline swiftly in the second half of 2008 and rubber prices at the beginning of 2009 fell briefly to their lowest level in many years.

The raw materials of automotive tire manufacture have been rising fairly steadily since the start of 2009 though, as subsequent to the global crash of 2008/9 world sales picked up, helped by the fitful global economic recovery and the lower costs of production and sale. With a recovering US auto industry and increasing auto sales this has led to an increase in automotive tire demand.

China's tires were initially seen as being far too cheap in the world's markets. To prevent China from (it was claimed) dumping low-cost tires in the competitive US market, one of the first major decisions of the new Obama trade policy in September 2009 was to impose a tariff on tire imports from China by the US. The tariff was set at 35% in the first year, 30% in the second and 25% in the third.

This did relatively little, however, to stem the tide of rising tire demand, and cuts to supply were caused by extreme floods in Southeast Asia and the disruption caused in early 2011 by the devastating Tohoku earthquake and tsunami in Japan.

World demand for natural rubber is forecast to rise by a further 4.6% to 11.5m tonnes in 2012. But production is forecast to rise 5.1% further this year to 11.4m tonnes. So as with any wheel, the market should be nicely balanced.

By the way, as an aside, it is apparently official that Lego is the world's largest manufacturer of tires, supplying more than twice as many as any other tire company on earth! Unfortunately the tires that they manufacture for their main customers tend to be rather too small to fit on the average consumer car -- even those we drive in Europe.

- Robert Miles, Mintec Ltd.

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