Will the Tyre Market See Price Deflation in 2009?

Prime Minister Gordon Brown’s decision to “act now on tax” and cut VAT from 17.5 to 15 per cent is welcome news to those watching household incomes as the dreaded recession bites. The VAT cut means the average family (according to the Low Tax Alliance) will save £341 a year – about enough for four bread and butter tyres or a pair of premium high-performance products. But, while increasing consumers’ ability to spend is always welcome to the trade, it doesn’t have any bearing on what tyre manufacturers will do with their prices in 2009.

For the last six years there has been a continuing upward trend in tyre pricing, mainly driven by increased fuel and raw material costs. In recent months the rate and volume of price increases has crescendoed. Far Eastern suppliers have increased the prices the most, but it is a trend that can be seen across all segments and markets. However, the ripple effect the global economic slowdown has had on things like OE production looks like it has put paid to these kind of continuing price increases. Lower demand and less competition for raw materials means increasing pressure to put the prices hikes in reverse.

In a recent report on Michelin’s financial performance, Morgan Stanley analysts wrote: “We believe it is simply unrealistic to expect current tyre prices to hold during an historic collapse of volume,” explaining that they believe the recent fourth quarter round of prices increases will be the last “for possibly years to come.” Their conclusion is that the sudden collapse in sales volume being experienced in most markets must be confronted by production cuts this year. As a result the analysts expect premium manufacturers such as Michelin to control year-end inventories with production suspensions in December.

As this month’s Tyres & Accessories went to press natural rubber prices reached a three year low (see December’s magazine for further details). At the time RSS3 grade was at US$1.39/kg, below the average price paid by leading companies like Michelin in both 2008 (USD 2.8/kg) and 2007 (USD 2.3/kg). Analysts agree that tyre pricing is strongly related to market sales volumes, so put slow volumes and plummeting raw material prices together (in the context of tyre prices that were justified on the basis of the same high input costs) and the result is reduced sales prices.

For their part the Morgan Stanley analysts claim the price cuts are already here. However, the “four for the price of three” offers they cite as evidence price cuts are already on us have been around all year. As is often the case, the prognosis for 2009 is likely to be more nuanced that simple price slashing.

The latest pricing data T&A has seen shows that the majority of prices are on a downward trajectory. Encircle Marketing made 23,496 mystery calls to retail branches over the course of the year to November and collated 87,646 prices across 36 brands. In short what they found is the market’s pricing policies seem, rather like chancellor Alistair Darling’s pre-budget statement, to reduce prices at the bottom and particularly the middle of the market, while at the top end (especially in relation to run-flat tyres) prices are actually going up.