Raw material costs are once again being blamed as the culprit in the latest spate of tire and rubber product price increases.
Raw materials such as natural rubber, synthetic polymers and petrochemicalsalways major factors in the cost of any finished rubber goodshave been especially crucial in the past year or two.
The roller coaster ride of petroleum prices since the beginning of 2008 has ensured that. Petroleum hit $147 a barrel, with gasoline reaching $4 a gallon in the summer of 2008. Those prices fell to roughly half those levels by December 2008, but now are climbing again. Oil is now hovering between $75 and $80 a barrel and gasoline in the $2.75 a gallon range.
At the same time, however, other factors have gained prominence. The 35-percent tariffs President Barack Obama levied on consumer tires imported from China, beginning in September 2009, have led U.S. tire distributors to complain of higher prices across the board for the tire market, especially at the bargain end.
So, at this juncture, what is happening to raw materials prices? Are they still the main reason for product price increases or are tariffs and other factors more important now?
Most rubber companies are reticent about discussing their pricing decisions, and this point in time is no exception. Cooper Tire & Rubber Co. declined comment for this article, as did Bridgestone Americas, which on April 1 enacted a 5-percent price increase on all its Firestone-brand agricultural, forestry and construction tires.
Group Michelin also chose not to discuss its raw materials experiences in depth, preferring to allow its fiscal 2009 report, released Feb. 12, to speak for the company.
The market visibility prevailing in early 2010 and the rising cost of raw materials (particularly natural rubber) are prompting us to exercise extreme vigilance, said Michel Rollier, Michelin managing general partner, in a press release with the company's 2009 financial results.
In those results, the tire maker stated that the negative impact of raw materials prices, combined with low capacity utilization and depressed markets, contributed to massive losses in the first half of 2009. In the second half, however, raw materials prices had a positive impact and helped redeem the year for Michelin.
Goodyear raised prices up to 6 percent on its consumer tires effective Dec. 1, then increased prices by up to 5 percent on its commercial truck tires, effective Jan. 1. Tariffs played no part in the Akron-based company's price hikes, a company spokesman said.
We don't really compete in that segment of the market where China is, he said. Less than 2 percent of our production comes from China.
As for raw materials, it isn't just what they cost that determines how they affect product manufacturers and their prices, he added.
It depends on what you're paying for raw materials, when you bought them, your accounting methods and how long it takes the materials to go through the process, he said. There can be a lag time of three to six months between raw materials purchases and their effect on the bottom line, depending on the product.
Because of different accounting and manufacturing methods among product makers, no one can really pinpoint the tipping point when the manufacturer must pass on raw material price increases to the consumer, the Goodyear spokesman said.
I don't think anyone can really say that when they hit an X-percent increase in raw materials costs, they have to raise their prices, he said.
For Continental Tire the Americas, market conditions and the actions of competitors are key to pricing decisions, according to Bill Caldwell, Conti vice president of sales and marketing.
We always try to position our products competitively, Mr. Caldwell said. It's a normal part of business. We're constantly revisiting where our products are positioned and adjust prices in reaction to what our competitors are doing.
Tariffs on Chinese tires may have a short-term effect on prices, but in the long run raw materials prices will remain the prevailing factor, according to Mr. Caldwell. He, too, said that there's no such thing as a tipping point.
The problem over the last two years has been the huge volatility in raw materials prices, plus a little bit of uncertainty as to what the future holds, he said.
No one has the perfect crystal ball as to what raw materials will do in 2010, Mr. Caldwell added. But no one wants to wait 'til the last minute and do something drastic; customers don't like that. We just try to keep up and remain competitive.
Among raw materials, ethylene has seen the steepest jump in prices, because ethylene prices have been at least partly divorced recently from the actual cost of petroleum, according to Kathy Hall, executive editor of the petrochemical industry newswire PetroChemWire.com.
Ethylenea monomer that is a feedstock used in some of the elastomers employed in tire makingis the most produced organic compound in the world and, according to Chemical and Engineering News, global production of the substance exceeded 107 million metric tons in 2005.
There were plant operations problems that were unexpected, Ms. Hall said of ethylene production, adding that specialty chemicals such as ethylene and polypropylene are made at steam cracker facilities, mostly in the Gulf Coast areas of Texas and Louisiana.
One or two usually will be in a state of maintenance at any given time, she said. But if two or three others are down, that creates a supply problem.
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