ROCHESTER HILLS, Mich. (March 17, 2003)—These are strange and tough times we're in right now, and retreaders and commercial dealers have not been immune from their consequences.
War tensions with Iraq are mounting, oil prices are skyrocketing and the stock market is still in a state of frozen fear. Business is tough. Does it seem that by the time you can make ends meet, they've moved the ends?
Does it seem like while you started out with nothing, you still have most of it? But despite the cost of living, have you noticed how popular it still remains?
There certainly is a great deal of uncertainty, volatility and change occurring now that's affecting commercial tire dealers and especially retreaders. Here are some of the issues facing the industry.
The economy is always the thing that has the biggest impact on anyone's business—including truck tire dealers and retreaders. Many economists believe that 2003 is starting out slowly and will be building in strength as the year progresses. By the second half of the year, the economy should be going strong, and a 3.5- to 4-percent growth rate is expected.
However, there are caveats in these projections. Some economists have said they believe that an economic recovery is only possible if President Bush's tax cut proposal is passed, which should stimulate the economy. Almost everyone in the know believes that a war with Iraq also will help the economy, provided it goes well and ends quickly. If it drags on and if oil production is disrupted elsewhere in the Persian Gulf, the economy will be hurt and an economic recession is probable.
According to the Rubber Manufacturers Association, re-treading is ex-pected to grow 2.1 percent in 2003 and produce about 16.6 million retreaded truck tires in the U.S. However, only about 990 retread shops will produce them—down from 1,082 in 2002.
Rising oil prices
One of the biggest issues facing retreaders is the rising price of fuel. While this is a problem for all Americans, tire and tread rubber manufacturers are especially vulnerable to price hikes since tire products are so oil-dependent.
For example, an 11R22.5 medium truck tire requires approximately 25 gallons of oil to produce, and its retread equivalent requires about 15 gallons of oil. Any major fluctuations in oil prices seriously impact production costs.
The Energy Information Administration of the Department of Energy believes world oil markets likely will remain tight through most of 2003 as petroleum inventories and global spare production capacity continue to dwindle amid blasts of cold weather and constrained output from Venezuela.
OPEC (Organization of Petroleum Exporting Countries) efforts to increase production to make up for lower Ven-ezuela output has re-duced global spare production capacity to only 2 million barrels per day, leaving little room to make up for un-expected supply and demand surprises.
The uncertainty surrounding Iraq likely will render markets abnormally volatile at least for the near-term. If the Venezuelan oil strike is prolonged and tensions in the Middle East continue, the chance of a price spike will remain high.
Tire/rubber price hikes
Late last year, all of the major tire manufacturers, as well as the major tread rubber manufacturers, announced price hikes on commercial truck products of around 3-5 percent as a result of rising raw material costs. However, if in-creases in the costs of natural rubber (projected at 17 percent in 2003), butadiene, styrene and carbon black as well as crude oil continue, pressure could be put on manufacturers to increase their prices again.
Rising operating costs
Costs also are expected to increase in the areas of transportation, energy and health care in 2003.
With the folding of some very large and many small carriers in 2002, overcapacity in the trucking industry has been reduced. This year's continued climb in diesel fuel prices—more than 30 cents per gallon since Christmas—has hit an all-time high and is putting many more smaller carriers out of business.
As a result, trucking companies have raised their rates for 2003, and they appear to be sticking. You can expect to pay more for freight and find that you have less leverage in obtaining rate reductions.
Energy costs increased this winter compared with the 2001-02 winter. Natural gas was up 28 percent, heating oil increased 52 percent, propane rose 24 percent and electricity increased 10 percent. Spot prices for fuels surged as crude oil and natural gas prices rose rapidly in the face of the Venezuelan oil export cutoff and sharply falling levels of domestic natural gas storage.
The annual average retail prices for both heating oil and diesel fuel in 2003 are expected to be about 20 cents per gallon higher than the 2002 levels, and the cost of electricity should increase 10 percent on average.
Liability and health care insurance costs continue to rise as well. If you've still got any insurance, you can attest to this fact. The good news is that increases may be leveling off, with most increases in the 15-20 percent range. The giant increases seem to be in the past if you've got a good safety/liability record.
However, if you need help with keeping your insurance costs down and making informed decisions about business insurance policies, contact the Tire Industry Association (TIA) at (800) 876-8372. It will connect you with Risk Assessment Management Services, its partner in TIA's battle against skyrocketing insurance costs.
TREAD Act impacts
The Transportation Recall En-hancement, Accountability and Documentation (TREAD) Act was passed by Congress in October 2000 in response to the Firestone tire recall. There are many aspects to this act but a few that impact retreaders are highlighted below.
It appears that, for the moment, the commercial truck tire retreading industry has dodged a bullet in regards to a tire labeling rule from the National Highway Traffic Safety Administration (NHTSA). The final rule requires that the DOT code that contains the retreader ID code and production date be applied to only one side of the tire. The maximum air pressure, material and ply information molded on the tire by the original tire manufacturer will remain on the sidewall.
However, those retreaders who process passenger and light truck tires aren't so lucky. The tire identification number has to be applied to both sides of the tire. All characters in the tire identification number have to be at least ¼-inch high to increase readability.
This could cost these retreaders $2-$5 a tire, which could seriously alter the profitability of producing passenger and light truck retreads. This labeling rule goes into effect Sept. 1, 2003, for all tires made on or after that date. If you feel strongly about this issue, contact TIA, which is still lobbying for a change in this rule.
The TREAD Act also mandates re-evaluation and revision of the performance standard for new truck tires.
The tests currently used to evaluate their performance were designed in 1968 before radial tires were prevalent, and these tests are obsolete. The government is now in the process of testing new truck tires to determine their performance levels and will then test the performance of commercial retreads against that of new medium truck tires. Since 54 percent of all replacement truck tires sold in the U.S. in 2000 were retreaded, NHTSA believes it is important to include them in any new regulation.
The tests being run by Akron-based Smithers Scientific Services include running the tires to destruction at fairly high speeds on a 67-inch test wheel, which is very small for truck tires and should fail tires quickly. As a result of the efforts of several industry groups, NHTSA's original proposal to test second retreads with a heavy lug tread design was dropped, and the agency agreed not to test retreads that have been repaired.
The good news is that NHTSA has no desire to become a certifying agency unlike government agencies in Europe that test retreads and put retreaders who fail their tests out of business. NHTSA wants to continue its past practice of self-certification in which each producer certifies that its products will conform to the safety standards the agency establishes.
Although this issue is still in the formative stage for retreads, it is probable that this certification requirement may be met with a thorough inspection of the retread product.
Tire pressure monitors
As part of the TREAD Act, NHTSA also is expected to require tire pressure monitoring systems on commercial vehicles.
It agrees that underinflation due to road hazards and poor inflation maintenance causes rubber debris on the road. To this end it will evaluate pressure monitoring systems and their benefits to users.
It will probably issue a final rule sometime in 2004. At issue will be the type of technology used to determine an underinflated tire, whether in-cab monitors will be required and whether certain types of inflation maintenance or monitoring systems will be mandated. The trucking industry is generally in favor of tire pressure monitors. However, it does not want one technology forced down its collective throat since no one type of technology will work for everybody.
For years, retreaders have wished for tire pressure sensing tags in tires that would advise them whether a tire has been run underinflated and of the number of miles a tire has run. That would allow them to make a qualified decision on whether the tire is retreadable and the type of tread to put on it. The TREAD Act may help make this a reality or it may dash all hopes of achieving this dream, depending upon how NHTSA rules.
Retreaders should keep a close watch on this issue and let TIA know how you feel.
Market share pressures
The battle for retread market share among retreading systems suppliers continues.
Retreaders are experiencing more pressure than ever before to change retread supplier allegiances. And many retreaders have changed their business alliances in the past year.
McGriff Industries parted company with Michelin Retread Technologies Inc. (MRTI) and took over four Bandag-owned Tire Distribution Systems commercial outlets and a retread plant in Alabama in addition to setting up a new Bandag franchised plant in Cullman, Ala., its home base.
Schrader's Tire & Oil switched from Oliver to the Marangoni Ringtread process and Heintschel Tire & Service also added Marangoni Ringtread to its existing independent retreader operation. Raben Tire Co. purchased its first Goodyear NextTred retreading facility from Wingfoot Commercial Tire Systems to augment Raben's other two retread plants.
Cooper Tire & Rubber Co. purchased the retreading operations of Hercules Tire & Rubber Co. as well as certain retread-related assets from Teknor Apex. The Findlay, Ohio-based tire maker is integrating them into its existing Oliver Retreading Systems and Products business in an effort to better serve independent commercial retreaders.
And to expand the sales of retreads from its franchisees, MRTI has opened up the distribution channel for Michelin retreads to dealers who sell new Michelin truck tires. This could expand MRTI's distribution network from about 200 now to as many as 1,500 points of sale.
So 2003 should continue to be fraught with uncertainty, volatility and change. How much of this will affect you directly will depend on how you react to events and seize opportunities. Remember that the things that come to those who wait are usually the things left by those who got there first.
But no matter what, keep smiling. It makes everyone wonder what you've been up to!