Tire manufacturers have begun passing cost increases onto consumers, a trend we expect to continue in the near term. Tire prices increased by a modest 0.8% y/y in the third quarter, but increases will accelerate as more of the costs are passed to consumers. In 2018, we expect tire prices to increase an average of nearly 2.4% y/y each quarter.

Drastic upstream costs are responsible for the upcoming tire price increases. In the first quarter this year, costs for tire manufacturers increased by a record-breaking 22.0% y/y (year-on-year). These cost increases have persisted, though at a decelerated rate; in the third quarter, costs increased by 9.8% y/y. In particular, truck and bus pneumatic tires will see price increases; price increases will average 2.4% y/y in 2H 2017 before averaging over 3.5% y/y in the first quarter of 2018.

Two primary areas are responsible for the cost increases tire manufacturers are seeing: stricter environmental regulations and surging upstream material costs.

Stricter Environmental Regulations

Environmental regulators have been cracking down on chemical plants in Asia this year, tightening restrictions. These more stringent regulations have reduced chemical supplies integral to synthetic rubber production, driving up prices. Consequently, in an effort to adapt to these higher upstream costs, tire manufactures are raising their prices.

In China, environmental regulators have been taking an especially strict stance in their latest round of regulations. Authorities have routinely shut down chemical facilities without evidence of non-compliance before proceeding to inspect the plants; they then only allow facilities to re-open if they are deemed to be compliant with regulations. Thus, plants that are in compliance are still experiencing periods of interrupted production, hampering the supply of feedstock chemicals for rubber. The Shadong province, home to a number of tire facilities and feedstock plants, has been hit particularly hard during the latest regulatory crackdown; ten tire producers in the region increased by their prices by more than five percent in direct response to the shutdowns, which forced costs up. As the regulatory crackdown continues, it is likely more price increases for tires are on the way.

Upstream Costs Surge

Regulation crackdowns have been a serious source of upward pressure on tire prices, but other factors are playing a role as well. Global rubber prices have climbed this year as both supply and demand developments have pushed up prices.

Earlier this year, storms rocked Southeast Asia, home to the largest source of natural rubber supply in the world. Meanwhile, demand increased for natural rubber as it became more attractive with rising synthetic rubber prices. With increased demand and disrupted supply, natural rubber prices climbed upward. Even as supply disruptions pushed up natural rubber prices, synthetic rubber prices were less attractive as feedstock costs spiked (due to the aforementioned regulatory crackdowns), primarily for styrene and butadiene.

Global rubber prices retreated for a brief period after the spikes seen earlier this year; however, the price increases have since resumed. Environmental regulations are continuing to put persistent price pressure on rubber prices, while recent chemical production disruptions in the Gulf Coast have led to a bump in prices. Tires are feeling these price pressures as the cost increases trickle downstream.

Bottom line: Tire price increases are coming as manufacturers look to make up for increased costs - buyers are advised to make purchases as soon as possible.

Cole Hassay, Economist with the Pricing and Purchasing Service at IHS Markit
Posted 12 October 2017