Published on February 6, 2014

Expect OTR sector to grow,…but not much

Caterpillar Inc. photo

AKRON (Feb. 6, 2014) — The North American OTR tire market will get a slight boost from a moderate increase in construction projects this year, but the mining industry will be essentially flat, industry experts contend.

"The biggest concern is probably the coal industry and what's going to happen there," said Tim Easter, director of OTR sales for Yokohama Tire Corp.

Government regulations and power plants switching to lower-cost natural gas from coal hit the coal mining industry hard.

"2014 looks relatively flat and a lot of it depends on the type of mining. Coal is down considerably. Gold prices are down so that mining in that area continues to be down. I think 2014 is going to mirror 2013," Mr. Easter told Tire Business.

Bill Van Someren, director, mining business segment, Michelin North America Earthmover Tires, offered a similar assessment. "We experienced a higher demand level in 2012 compared to 2013, primarily due to a mild winter and a rebuilding of dealer and customer inventory levels. This demand leveled off in 2013, and we anticipate a similar demand curve to be experienced in 2014," he said.

Meanwhile, the American Road & Transportation Builders Association (ARTBA) is forecasting a modest increase in construction spending compared with last year.

The ARTBA expects double-digit growth in airport runway and terminal work, a 6-percent increase in bridge and tunnel construction, and increased construction investment in waterways, ports and rail systems, while road paving will continue to be down due to uncertainty over federal funding of state highway programs.

Housing construction also is rebounding, with an expected increase of 9 percent to $555.3 billion — higher than the 5-percent increase to $508 billion estimated for 2013, according to McGraw Hill Construction's 2014 Dodge Construction Outlook.

Yokohama Tire Corp. photo
Tim Easter, director of OTR sales for Yokohama Tire Corp.: "2014 looks relatively flat, and a lot of it depends on the type of mining."

"We see 2014 as another year of measured expansion for the construction industry," said Robert Murray, McGraw Hill Construction's vice president of economic affairs. "Against the backdrop of elevated uncertainty and federal spending cutbacks, the construction industry should still benefit from several positive factors going into 2014."

As OTR tire demand flattened out last year, shortages have dissipated in both the mining and construction segments, according to several tire makers.

All manufacturers are going to have limited supply of particular sizes due to demand spikes at different times, according to Mr. Easter. "Overall in the OTR industry the supply is good," he said.

"Issues regarding fill rates really only impacted a few tires, primarily on the larger sizes. And even these were far and few between," said Michelin's Mr. Van Someren, noting that last December Michelin opened an earthmover tire plant in South Carolina "to better serve the needs of the market and meet spikes in demand."

Construction market

In retrospect, the tire industry was overly optimistic about the construction market in 2013. as transportation and housing projects were slow to pick up.

"In 2014 we are looking forward to a strong market and a solid year in the construction industry," said Michelle Lane, manager of OTR marketing for Bridgestone Americas. "Things are trending up.

"Obviously, we've seen construction confidence being optimistic and housing trends are starting up," she noted, although the lack of federal government funding has delayed many infrastructure construction projects.

"The construction industry seems to be improving, moderately. It's not growing in leaps and bounds but we are starting to see some recovery in that industry," Yokohama's Mr. Easter said.

"Construction spending is supposed to be 5- to 10-percent higher than last year," said Bruce Besancon, vice president of marketing for Alliance Tire Americas Inc. "Some of it is led by private building…. It is led by the private sector vs. governmental sector.

"The governments over the last couple of years continued their decrease of spending. We see that there is going to be a backlog of infrastructures projects that have to come out and move forward. So at some point, that has to break free."

The ARTBA predicts the paving market will grow to $54.4 billion in 2014, up 2.6 percent nationally. This includes $42.7 billion in public and private investment in highways, roads and streets, and $11.6 billion in largely private investments in parking lots, driveways and related structures.

"Over the past 10 years, on average nationally, federal funding has provided 52 percent of the money invested by state transportation departments in road and bridge capital improvement projects," said ARTBA Chief Economist Alison Premo Black.

"Absent congressional action to improve the revenue stream into the federal Highway Trust Fund before next October, federal support for state programs faces a potential $40 billion cut in fiscal year 2015," she said. "That uncertainty is already putting a damper on state project lettings."

The ARTBA predicts bridge and tunnel construction will increase to a record $30.1 billion this year from $28.5 billion in 2013. The port and waterway construction market — which has grown by a third since 2011 in anticipation of increased sea trade through the Panama Canal starting in 2015 — is expected to grow another $100 million, to $3 billion next year.

Airport runway and terminal construction is predicted to increase 17 percent to $14.7 billion in 2014. Subway and light rail work will grow 5 percent to $7.9 billion from $7.5 billion.

McGraw Hill predicts single-family housing construction will grow 26 percent in dollars, corresponding to a 24-percent increase in units as foreclosures decrease, home prices increase and mortgage rates remain near recent lows. However, the demand for housing will continue to be restrained by tight bank lending practices, according to McGraw Hill.

"The 2014 picture bears some similarity to what's taking place during 2013, with single family housing providing much of the upward push; multifamily housing showing a slower yet still healthy rate of growth after four years of expansion, and commercial building gradually ascending from low levels," Mr. Murray said. "One change that's expected for 2014 is that institutional building will no longer be pulling down nonresidential building and total construction."

Standard & Poor's Financial Services L.L.C. predicts strong growth for new home construction in the U.S. through the next two years as housing starts climb to 1.1 million units in 2014 and approach a historical long-term average of about 1.5 million units in 2015.

Mining

"There has been general softness in the mining market as a whole," Bridgestone's Ms. Lane said. "We saw that last year. What our projections are saying is that will continue for 2014.

"I think our biggest concern right now is obviously in the coal area. Coal does not seem to be picking up quite like we had hoped. And right now there is not a whole lot that market can do in the future. 2014 we have a little growth, maybe projected in the second half, but as far as the first half, not looking really positive."

A weak and uneven economic recovery could boost demand in the mining sector, but not sufficiently enough to fully absorb the oversupply of many metals and minerals, according to Standard & Poor's.

"The domestic coal industry is the most challenged, entering its third year of relatively weak demand and low prices," according to Standard & Poor's.

Alliance Tire's Mr. Besancon noted that other markets, such as waste management and heavy industrial sectors, have helped offset the downturn in the mining sector.

"Things didn't completely collapse. There is always work going on…. A lot of the tires we specialize in don't just go into mining, but they also reach over into the industrial and construction as well. And as we see construction picking up, we're able to go after that market as well," he said.

"I don't think the business is going to stay flat forever. You'll see some growth in some of that mining, even in the second half of 2014…. It's not an uncommon trend in the OTR industry to see peaks and valleys," Yokohama's Mr. Easter said.

With some tire overstocks in warehouses and raw material costs dropping from historic highs, OTR tire pricing has been stabilizing and even going down, according to tire makers. "We do anticipate pricing to stay about steady here in the next year," Bridgestone's Ms. Lane said.

And there is still high demand for the 57-inch and 63-inch giant tires, she added.

Customer trends

"The biggest trend we're going to see is a big reliance on our distribution network," said Ms. Lane, noting that mining and construction customers are looking for additional services, such as tire tracking and expecting to get more value out of their tires.

She said tire dealers need to be aware of their customers' needs and monitor each customer's situation and changes in the market. "Generally, in mining, customers are getting more sophisticated," she added.

"The one thing the dealers should be aware of is that their customers are going to be more demanding of them as we go forward," said Alliance Tire's Mr. Besancon.

"Let's face it—those that have survived over the last few years are survivors. They are going to be the ones that want the most out of their dealer. They want to form those relationships with the dealer. They rely on him to make a good recommendation and service his product.

"And those that can give them a good value, good value for the money they pay, in both the service, the selection and then the service of the tire, those are going to be the dealers that win," he said.

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To reach this reporter: kmccarron@crain.com; 330-865-61

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