Friday, November 5, 2010

Tires get more expensive as rubber prices rise

CLEVELAND, Ohio -- Tire prices are going up, and they should continue to rise next year as tire makers deal with skyrocketing prices for rubber.
"People who haven't purchased tires in the past 18 months are going to be unpleasantly surprised if they go to replace at the end of the year," said John Turk, chief executive officer at Conrad's Tire Express and Total Car Care.
Earlier this week, Bridgestone raised its tire prices by 8 percent. Findlay, Ohio-based Cooper Tire & Rubber Co. raised its prices 6.5 percent. Several other major manufacturers have gone through two price increases this year with more expected to come.
Rubber is the prime culprit. At the end of 2008, rubber cost tire makers 57 cents per pound. In April, a pound or rubber cost $1.79. Prices have dipped slightly since then, but they remain at 15-year highs.
The drastic increase has caused huge financial headaches for tire companies. Goodyear Tire & Rubber Co. spokesman Keith Price said rubber accounts for about 25 percent of what Goodyear spends on raw materials. Petroleum-based synthetic rubber makes up another 25 percent.
That rapid increase in rubber prices led Goodyear to report a $20 million loss in its third quarter last week. The company said it expects to continue struggling with rubber prices through the rest of this year.
During Goodyear's earnings conference call, Chairman and Chief Executive Richard Kramer blamed market speculation on the big rubber price increase. He said rumors of bad crops, coupled with expectations of economic growth led some investors to bet on rubber shortages. He said those bidders pushed rubber prices higher.
"We believe speculation has taken prices well above levels that make any sense to us," Kramer said during the call.
While the tripling of rubber prices in less than two years is dramatic, it does fit into long-term patterns for that industry.
Over the past decade, rubber prices have averaged a 16 percent growth rate each year. Since 2005, that rate has been more than 19 percent.
Tim Denoyer, an analyst with New York research company Wolfe Trahan, said tire makers have responded by raising prices, but those increases haven't come close to making up the difference.
The average tire price has only gone up by about 2 percent a year, data from the U.S. Bureau of Labor Statistics show.
"It's a big, long-term problem. It's not just weather in Thailand," Denoyer said.
Rubber prices started moving up sharply toward the end of 2004 as auto sales in China and other developing markets lead to increased demand for rubber.
Rubber companies responded by planting more trees, but it takes seven years for a tree to grow large enough to produce rubber sap.
"There was a real lack of investment until 2005," Denoyer said.
Trees planted that year will start producing rubber in 2012, but it's not clear that the increased supply will lower prices. Analysts expect global demand for cars and tires to grow rapidly while those trees grow.
Goodyear and other tire companies are investing in new technologies that could replace natural rubber with synthetic rubber derived from other plants. But those products are years away from providing the material needed to make tires. Denoyer said he doesn't expect raw materials costs for tire makers to drop significantly until they can master such technologies.
Turk said he doesn't see any end in sight to the regular price increases the tire makers have been charging him and other retailers.
"Commodity prices are going to keep going up," Turk said.
(cleveland.com)

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