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Wednesday, December 17, 2014

Cost of tires

Had a question concerning the cost of tires, which some think does nothing but go up, as it relates to the current downturn in the price of gas at the pump.

The argument was that since gas prices have gone down so should tire prices.

Yes it is true that a good portion of the "rubber" in tires is really synthetic which means the raw material is petroleum based. Today's passenger, LT or ST tires have very little if any natural rubber but as you move up in size there is an increasing % of natural rubber.  Some 22.5 size tires have natural rubber as a component but without access to the secret proprietary formulas I can't address the % which could range from 0% to maybe as much as 25% or more.
There is also the special high strength brass plates steel to consider along with numerous other materials such as Silica,
From Whikipedia we see
  • Natural rubber, or polyisoprene is the basic elastomer used in tire making
  • Styrene-butadiene co-polymer (SBR) is a synthetic rubber which is often substituted in part for natural rubber based on the comparative raw materials cost
  • Polybutadiene is used in combination with other rubbers because of its low heat-buildup properties
  • Halobutyl rubber is used for the tubeless inner liner compounds, because of its low air permeability. The halogen atoms provide a bond with the carcass compounds which are mainly natural rubber. Bromobutyl is superior to chlorobutyl, but is more expensive
  • Carbon Black, forms a high percentage of the rubber compound. This gives reinforcement and abrasion resistance
  • Silica, used together with carbon black in high performance tires, as a low heat build up reinforcement
  • Sulfur crosslinks the rubber molecules in the vulcanization process
  • Vulcanizing Accelerators are complex organic compounds that speed up the vulcanization
  • Activators assist the vulcanization. The main one is zinc oxide
  • Antioxidants and antiozonants prevent sidewall cracking due to the action of sunlight and ozone
  • Textile fabric reinforces the carcass of the tire

What hasn't been addressed is the research, manufacturing and transportation costs. With the ever increasing pressure for improved fuel economy, smooth and quite ride as well as, long wear and all season performance the R&D efforts are continually increasing.

I think it is important to remember that oil price at the pump is a poor reflection of the real cost of the commodity especially when most of the materials are  bought based of future delivery so current day to day variations have little affect of the price of oil someone is willing to commit to 5 months or a year in the future.

Another thing to look as is the profit margin of the tire companies over a multi-year basis.  For example I believe Goodyear profit in 2013 was about 3% of sales income.

If you want the nitti gritty check this web site and you will see the Return on Assets ranges from negative 6% to plus 5%

 Here is a good article on the topic.
and another that focuses on the raw materials.

Now please remember I may be a tire engineer and I even play one at RV Conventions but I am not a financial advisor and as we all know past performance is no guarantee of future performance.

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