By: Luigi Caffù. Published in Linkedin.
A long term historical overview
As I recently went through an old number of MTD (Modern Tire Dealer of Jan 2016), my attention was caught by a long term chart representing US passenger tire market and the main recessions that hit US since 1929.
In this article I will not focus on OE, which heavily depends on the historical evolution of new vehicles production and registrations, and which can broadly fall during a major recession period (… consumers simply stop buying cars, causing an increase in the average life of circulating cars).
My interest falls on Replacement, that grew substantially during the years reaching a current level of around 200 million.
As stated in the MTD article, replacement shipments have a cumulative historical growth because US population have been growing. This is for sure an over-simplified statement, because the growth of the replacement market has been affected by other factors too: average number of cars/family, tire avg mileage evolution, vehicles yearly mileage… but at the end the population growth seems to be a major driver for replacement tire shipments.
The CAGR (Compound Annual Growth Rate) of the population in the period 1930-2010 was around +1.2% yearly. This means that, in the average, the population in the USA have grown at a yearly 1.2% rate in these 80 years. The replacement tire market of the first part of the 20th century was heavily impacted by the big Depression following 1929 and by World War II, but in the last years – let’s say from 1970 to 2010 – the CAGR resulted to be around +1%: substantially in line with the population growth.
A possible replacement market forecast to 2025
Now, we could try to answer to the question: what will be the tire market in 2025?
The answer could be given by forecasting a regular growth starting from the last info available (actual 2016 tire shipments: 208.6 mln, according to March 2017 RMA indications), using a CAGR of maximum +1% (US Census Bureau is forecasting a decrease of the yearly growth rate of population for the next years, around +0.8%). We could then agree that a fair estimation for 2025 would be around 225 mln tires.
All right, but …. To me this was the wrong question!
The right question should be: will the market growth of the next years be regular, or will we see a relevant risk of downturns?
Maybe the market in 2025 will be really around 225 mln tires, but for the most of the tire operators (manufacturers, distributors, dealers) it is very different to work in a stable market environment or in a oscillating one. See the chart: one thing is to work in a market that is growing a little bit year by year, another story is to arrive to same market in 2025 with a significant market drop followed by a recovery. History tells us that major downturns in tire market have created financial and operational challenges to all of the tire players, due – in first place – to sudden inventory decreases.
Sudden upturns of the market may also happen, but they are not dangerous as a decrease, and they seem less likely to happen in the next years due to the recovery after the 2009 Great Recession that already took place; a major market upturn in the future would probably occur only after a relevant market slump.
The next market drop
It will happen. History tells us that markets follow a general trend, but the growth is never linear… it is made of ups and downs. The problem is: nobody knows when it will happen, and – additionally – the institutions that should warn by time about the risks often realize that there is a problem, only after the outbreak of the problem.
The last Great Recession happened in 2008/2009: replacement tire shipments began to drop in 2008 (198 mln tires, -6 vs PY) and went on falling in 2009 (-8 mln vs PY). Do you remember what happened?
- In march 2008, RMA was still forecasting for FY 2008 a growth (from 204 to 207 mln tires).
- In march 2008, OECD was forecasting a flat GDP growth for the 1st semester of the year. The first quarterly drop vs PY occurred only in Q3 2008.
In march 2008 there was no major “red alert” for tire industry operators: organization like RMA and OECD tend to react to negative factors with some delay, waiting to have all the proofs before providing very negative statistical projections. This is a normal approach.
The problem is that their indications cannot be used as an on-time “red alert” for a market drop.
The solution is to keep monitoring other statistics that have been historically anticipating tire market drops: oil price and consumer confidence.
Oil is a critical factor for the tire market. When the oil price increases substantially, it impacts on the price of gasoline and families reduce their average mileage per year (..and less miles = less tires replacement).
This can be seen in many cases; if we focus on the last Great recession, we can observe the price evolution in the chart.
Source: Thomson Reuters
Compared to the previous years, the prices of march 2008 were showing a high level: around 100$ (and in the subsequent months the increasing trend went on). This was a clear indication of a possible big impact on the tire market.
At the moment, the wti price is still on a relatively low level, around 50$/barrel. It may be that in the short term the price can see a drop, due to the recent increase in US shale-oil activity and inventory increase, but in the medium term it is more likely to see a positive trend: the recent OPEC deal, together with the forecasted balance of global oil supply/demand, should push prices higher. I would suggest to begin to monitor oil prices if wti reaches 80 $/barrel.
The other relevant factor is consumer confidence.
In the past, this indicator has been a very good anticipator of downturns in US economy. A 20% fall of the index vs PY level has marked major recessions. In the chart we can see the index evolution in the last Great Recession: in march 2008 we could have been able to observe a greater than 20% decrease of the index vs 12 months before, therefore meaning “red alert”.
The current level of consumer confidence is at top high.
In conclusion, the most relevant indicators that typically anticipate market drops are not providing any risk of a near drop in US tire shipments. Anyway, my advice to tire manufacturers, importers, distributors and dealers is to regularly monitor oil price and consumer confidence, in order to be prepared to promptly recognize by time the next market drop.