Thursday, September 29, 2011

China Growth, Japan Production Create Strong Tire Demand

China's auto sales and Japanese vehicle output have climbed, boosting global demand for tires and rubber.
Record demand for vehicles in China – the world’s largest market – and the biggest increase in Japanese vehicle production in three decades means tire manufacturers are poised for record sales, reigniting a rally in rubber prices, according to a report by Bloomberg.

China’s vehicle sales exceeded the combined global total of General Motors Co. and Volkswagen AG, the world’s top two automakers, in the first half, and Japanese output more than doubled in three months as factories reopened after the March earthquake. Tire demand will shrink rubber stockpiles to 12% of use in 2012, a four-year low, estimates Citigroup Inc. Prices may jump 18% to $5 a kilogram (2.2 pounds) by Dec. 31, a Bloomberg survey of 15 analysts and traders shows.

According to JD Power & Associates, growing vehicle sales in China and other emerging markets will compensate for weakening demand in developed economies roiled by debt crises, giving carmakers their best year ever. After the March 11 earthquake and tsunami, Japan’s vehicle production collapsed to its lowest level since at least 1982. But that output is now resurging and reached 790,325 vehicles in July, about 1% less than in February, Bloomberg reported.

JD Power estimates that global sales of cars and light commercial vehicles will rise 4% to 75.4 million units this year, and a further 10% to 83.3 million in 2012. Tire purchases will increase 6.5% to an all-time high this year and a further 5.7% in 2012, according to Arifumi Yoshida, director at Citi Investment Research & Analysis in Tokyo.

“The global tire market has never been so tight,” said Citigroup’s Yoshida. “Tiremakers can’t respond quickly enough to demand because they suspended expansion plans (during the recession).”

Rubber Prices and Production
Even after the slump in rubber futures since mid-February, prices are still 15% higher than a year ago and about double the average of $2.135 over the past decade. The cost of synthetic rubber surged 76% in the past year and reached $4,450 a ton on Aug. 3, the highest since at least 1997. A supply shortage will widen this year because of shutdowns and capacity constraints.

Global demand for natural rubber will rise 5.3% to 11.58 million metric tons in 2012, the third consecutive annual increase, Citigroup estimates. Production will expand 5.4% to 11.59 million tons, too little to prevent a decline in stockpiles relative to consumption, the bank predicts.

Production in Thailand and Indonesia, which represent 60% of global supply, is below normal, as rainfall is disrupting tapping in Thailand and trees are shedding their leaves in Indonesia, Bloomberg reported.
Rubber stockpiles monitored by the Shanghai Futures Exchange stand at 33,766 tons, compared with a five-year average of 63,213 tons, data compiled by Bloomberg shows, helping to shore up prices and compensating farmers for lost output.

Tuesday, August 30, 2011

OTR Tire Market Update

It’s back to business and we have some interesting data for you this month.  Almost all of the major sizes 49” - 63” have experienced a small decline in average pricing.  Although a very small relief, we do not foresee this being cause for celebration.  Examining the peak prices during the previous shortage and comparing them to the recent growth patterns from May 2010 to present, there is still a lot of potential for largely inflated tire prices (especially when comparing truck shipment data from the two periods).  Just over the last year, the price for a 40.00R57 has increased 362% (May 2010 – May 2011).  

Natural Rubber remains one of the primary driving forces behind continuing price increases from manufacturers.  The market has experienced 77 individual price increases from 18 tire makers this year.  More concerning is the rapidly decreasing global inventory of Natural Rubber which will certainly lead to further price increases and shortage of the raw material to produce finished goods.  

Truck shipments are also casting an ominous cloud over OTR availability and pricing.  Start-ups and expansions will drive the demand for tires through the roof as we enter 2012, potentially throwing the spot market into a state of relative chaos.  Based on estimates of growth in key mineral sectors and geographic regions, we may see a global population of nearly 38,000 trucks (90 mt+) come 2015 – where in 2010 we found ourselves at approximately 27,500.  This projection represents a 12% increase against peak 2008 shipments when tire prices were at their highest points *(Parker Bay Mining report).  

We foresee the end of 2011 and the beginning of 2012 to be an extremely critical time.  As trucks begin to ship to large start-ups and expansions, the demand for tires will grow exponentially in the market... This of course means that less tires will be available to a growing population of trucks, ultimately driving prices further.  The mines that remain proactive in procuring tires, trialing new brands, and finding trusted suppliers, will remain rolling at the lowest average cost... The others may find an up-hill battle to keep units in operation at the dear expense of profits.    

Wednesday, July 20, 2011

Around The Tire Shop - February 2011

Welcome to the first monthly installment of “Around the Tire Shop”, a newsletter that encompasses everything OTR.

“The way to make money in a gold rush is to sell picks and shovels”

Needless to say the goal remains the same with today’s high commodity prices fueling growth and massive expansion. However, our techniques have become for lack of a better word, gigantic. Our picks and shovels have transformed into 400-Ton Haul Trucks and 2,300-horse power Front-End Loaders that operate in mines around the clock. Not to mention these monsters wield some of the world’s largest rubber made tires.

In 2003, the $6.1B Earthmover Tire Industry experienced a classic case of Supply and Demand imbalance that was abruptly halted by the Global Recession. Scholars couldn’t have written a more clear-cut case study to illustrate how the two powers affect each other in the course of operation.

Globally, we found ourselves in one of the most significant “Mining Booms” seen to date. China had emerged into a ‘Giant of Consumption’ striving to raise living standards and industrialize. Consuming 1/2 of the world’s Cement, 1/3 of the world’s Steel, and a 1/4 of the world’s Copper, it served as the primary driver behind record commodity prices and maximized mining production.

Prior to the Recession’s emergence, industry experts predicted the tire shortage to reach 2,000 tires per month through 2011 where the level may have decreased to 1,000 tires per month due to manufacturer expansions (for popular sizes: 49”– 63” tires). As Demand grew so did prices for surplus inventory known also as “spot”, “open”, or “grey” market tires.

Needless to say the Global Recession hit and it struck the mining industry especially hard. China halted many of its projects and expansions, which in turn reduced their voracious consumption of raw materials. Many mines scaled back operations due to overstocking issues and this void gifted the tire manufacturers with the time that they needed to play catch up.

In the name of mining cycles, the industry now finds itself in an interesting place. Negative signs of the Recession have tapered off; China is back to buying raw materials, mines are picking up where they left off with expansion projects, and tire manufacturers are already beginning to use the dreaded word; “shortage”. Aside from the already mentioned, we must introduce one looming perplexity, the Natural Rubber shortage, which is already affecting both pricing and availability of tires of all sizes worldwide.

Taking into consideration the information provided hereinafter, miners must begin to evaluate what hurdles come with high commodity prices, and coincidentally the largest of them all will be OTR Tires.

In next month’s installment we get down to specifics to evaluate the opportunities and options that mine’s have amidst the looming shortage, and more importantly, what they can do to stay rolling. We also take a look at the key driving forces in the OTR shortage and how each affects the outlook of this fast moving market.

Mining truck tires more expensive than Porsches, Miami condos

China’s insatiable demand for commodities has prompted a tripling in the price of mining truck tires, making them more expensive than a Porsche 911 Carrera S type or a condominium in Miami.

Prices for tires about 3.5 meters (11 feet) across, used on the Caterpillar Inc. trucks that haul iron ore and coal, have touched $100,000 on the spot market, according to Leighton Holdings Ltd., a contractor for mining companies including BHP Billiton Ltd. and Anglo American Ltd. Prices rose as high as $150,000 in 2008.

That compares with contract prices of about $30,000, according to Roesler Tyre Innovators GmbH, which retreads so- called off-the-road tires. Demand from China, the world’s biggest metals buyer, drove copper, iron ore, gold and coal to records this year, forcing companies to compete for the equipment and labor needed to mine them.

“We fear the situation will become as tight as in 2007,” Paul Roesler, managing partner of Dortmund-based Tyre Innovators, said by phone from the company’s Perth office, citing Michelin & Cie and Bridgestone Corp. as major suppliers. “We see tight tire supply and high prices become a challenge for mining companies again but we think that the large players have prepared for this and have better contracts with suppliers and have improved stock.”

‘Just Exploding’

Demand for mining tires is “just exploding,” according to Titan International Inc. Manufacturers are reporting full order books for off-the-road tires for the next 18 months and alerting customers to the risk of shortages this year, according to Global Markets Perspectives Ltd.

“Where we need to expand rapidly or where we have a new project, then we have to source tires on the spot market like everyone else,” said Christian Sealey, a spokesman at Sydney- based Leighton, Australia’s biggest builder, in a telephone interview. “In those situations we’re finding some inflation.”

The last time tire prices surged was during the mining boom before the global financial crisis. Barrick Gold Corp., the world’s largest gold producer, said in January 2008 that it paid as much as $60,000 a tire for its largest vehicles, while some sold for as much as $300,000 in Internet auctions. The tire drought left companies such as De Beers, the world’s biggest diamond producer, unable at times to use new trucks.

The Porsche 911, including tires, costs $91,450, the carmaker says on its U.S. web site, while the median price in the first quarter of a previously owned condo in Miami-Fort Lauderdale was $79,200, according to the National Association of Realtors.

Market Tightening

“There seems to be a tightening of the market,” Lyndon Fagan, an analyst at Royal Bank of Scotland Group Plc, said by phone Sydney. “There are comments there’ll be a wait for tires.”

In Australia, the world’s biggest exporter of iron ore, coal and alumina, there are a record A$174 billion ($183 billion) of minerals and energy projects at an advanced stage of development, according to government forecasts last month. Rio Tinto Group, the No. 2 exporter of iron ore, is planning a $14.8 billion expansion to double output in Western Australia’s Pilbara region to 333 million metric tons by 2015.

Rio is prepared, said Gervase Greene, a Perth-based spokesman for the company. “We have appropriate arrangements with long-term suppliers to ensure that these price movements don’t affect us.”

The price of tires used in Australia by Newmont Mining Ltd., partner in the nation’s biggest open-cut gold mine, increased 4 percent this year, though this was offset by a stronger local currency, said Brian Watt, a company spokesman.

“Smaller players and mining contractors will find it difficult to meet their demand because they don’t tend to have longstanding supply contracts,” said Tyre Innovators’ Roesler.

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