Our recent conversations with tire dealers leave us with the view that retail sellout trends have lost a bit of steam year-over-year. Sellout trends moved lower in December 2022 versus December 2021 levels.
We note this follows two months of positive retail sellout with November 2022 seeing the largest year-over-year gain of the last 12 months.
The net number of respondents indicating they experienced positive consumer tire demand year-over-year fell by 25%.
By contrast, November 2022’s reading was a high-water mark for the year.
While trends in tire retailing are always finicky, multiple dealers said that inventory was a bit harder to come by in December than in previous months.
Specifically, respondents to our latest survey indicated that certain tire sizes had either been discontinued or were not as readily available during the month. Some also told us that warehouses were running low on certain brands.
In addition, respondents said they were forced to absorb additional shipping fees, which – combined with already-elevated tire prices – caused retail sellout to turn negative as 2022 ended.
Given further pricing actions that were implemented at the start of 2023 by several tire manufacturers, our dealer contacts predict that the new year may present a difficult selling environment – especially without some winter weather-driven buying.
Looking more closely at volume during December 2022, we note that the Southeast region of the United States reported the strongest year-over-year growth. Both the Midwest and Northwest regions saw the weakest performance, with sellout in both areas falling by the low single digits.
Overall, we continue to hold the perspective that volumes in the long run will become more closely aligned with GDP growth. We will closely watch economic conditions as further Federal Reserve interest rate activity could spur further GDP declines.
Tier-two remains popular
In response to our question about product mix, respondents indicated that demand for tier-two tires and demand for tier-three tires at their dealerships were roughly equal in December 2022.
This appears to be consistent with the long-term trend we have seen, as tier-two tires were the most in-demand among our dealer contacts’ customers during nine of the 12 months in 2022.
Our contacts tell us that demand for tier-one tires decreased during December.
Given rising tire prices – as well as the increased price of all consumer goods and the influx of lower-tier tires during the back half of 2022 – the drop does not come as a surprise.
We also note that dealers have indicated that the pricing spread between tier-one and tier-two brands has become so large as the result of recent price increases, they are continuing to see a trade-down.
In our view, this represents the current realities of the marketplace, where some tire prices have simply become too high for many consumers to justify.
We maintain the position that consumer preference for tires changes based on the volatile economic situation. Over the long run, we believe tire buyers will continue to pick tier-two brands as they strike a balance between value and performance.
Raw material update
Looking at raw material costs, the “basket” of raw materials needed to build a basic replacement vehicle tire increased by just under 7% during the fourth quarter on a year-over-year basis, following a 25.2% jump during the third quarter.
We note that raw material prices continue to moderate as our raw material index in November fell 2.1% sequentially from October 2022 levels. (October fell 2% sequentially from September 2022.)
Based on data from November 2022, this would equate to a 6.5% decline in raw material costs from the third quarter of 2022 to the fourth quarter.
Holding current spot prices flat would equate to a 6.9% year-over-year increase in the cost to build a tire during the fourth quarter of 2022.
When examining specific raw materials, we note that the price of carbon black has increased for 23 months in a row – with year-over-year prices up 32.2% during the fourth quarter.
In assessing crude oil prices, we note some price moderation on this front, as prices have moved lower from their spring 2022 peak, driven by Russia’s invasion of Ukraine.
Oil prices grew an average of 9.7% during the fourth quarter, though we once again highlight sequential declines as oil prices fell by an average of 8% from the previous quarter.
Moving to natural rubber prices, our natural rubber index fell 20.6% on a year-over-year basis during the fourth quarter. Synthetic rubber costs grew by an average of just 2.6% during the quarter – although we note similar sequential declines to other raw materials.
Lastly, price pressure on reinforcement items continued to show moderation in year-over-year gains. Prices were up 13.2% during the fourth quarter of 2022. This compares to an average year-over-year gain of 43.3% during the third quarter.
