Cooper's Armes expects growth in tyre demand as consumer confidence improves

By Dave Zielasko, Tire Business

Uncasville, Connecticut -- The industry will see growth in tyre demand in 2010 as miles driven increases and consumer confidence improves, Cooper Tire & Rubber Co.'s top executive told tyre dealers attending the New England Tire & Service Association's annual convention and trade show 17 April.

“But it will be a modest amount of improvement rather than a major upswing,” Roy Armes, chairman, president and ceo of Cooper said, citing tyre demand and the pricing of raw materials -- specifically how prices move in relation to raw materials -- as the two biggest factors affecting the tyre business.

Raw materials, price hikes

The past two years have seen volatile swings in raw material pricing, he said. After rising to “incredible peaks” in 2008, prices of raw materials dropped dramatically in 2009. Since then they have been increasing steadily and rapidly.

“The fact is that the tire industry never fully achieved the pricing needed to offset those peaks in raw material costs in 2008 and therefore suffered huge financial losses,” he said.

“Then, in 2009, as raw material prices dropped, Cooper and other tire makers actually reduced pricing through most of the year.”

As for 2010, he said Cooper expects raw material pricing to continue climbing, “but we don't know the speed and magnitude of these changes.”

Driving this volatility are the prices of natural rubber, which has doubled in cost from the lows of 2009, and materials derived from oil, such as butadiene, he said.

Already there have been several prices increases announced this year by tyre makers, he said, including one by Cooper on 1 Jan and another just announced that will take effect 1 June.

Beyond these factors, the tire industry also is dealing with a tightness of supply. “The surge in demand in the second half of 2009 combined with low inventory levels affected, in some cases, the ability to supply tyres that were ordered,” he said. “We expect that as supply is brought back online, the tightness will begin to ease.”

Mr. Armes also noted US consumers continue to be very sensitive to price and the value they receive for the tyres they buy. This has caused some consumers to “shift down their purchases” in reaction to the uncertain economy.

New products, global issues

In 2010, Mr. Armes said Cooper plans to speed up the introduction of new products and improve customer fill rates as part of its strategic objectives for the year.

“As we move forward, there will be an increased cadence of new products being launched that, based on recent history, will have a great reception from both the consumers and yourselves,” he told dealers. “This will solidify Cooper's position in the market and provide a tremendous opportunity for our partners to grow with us.”

Cooper also has been working on bettering its fill rates and has seen improvement already. “As we bring more capacity on line, we believe that we should be positioned in the second half of this year to see additional improvements,” he said.

Mr. Armes also cited the intense competitive nature of the industry globally.

“There have been tremendous improvements made in both the products that are sold and the way that tyres are made,” he said. “As more capacity comes online in state-of-the-art facilities located in lower-cost countries, we expect this competition to continue.”

Globally, tyre makers are attempting to identify where growth will occur, recognising that the world is divided between mature markets that offer the largest volumes and emerging markets where growth likely will occur, he explained. This is not only geographically but also in products. “Achieving a balance of these two is critical to success,” he said.

Cooper has been broadening its manufacturing footprint over the past several years in conjunction with these industry shifts, Mr. Armes said. Historically the Findlay, Ohio-based tyre maker has been focused on North America, where the US accounted for 100 percent of the company's business several years ago. Today, about 67 percent of its revenue comes from North America.

This expansion of the company's manufacturing to Europe, China and Mexico “has allowed us access to lower-cost manufacturing in regions where growth has been higher,” Mr. Armes said.

Financial uptick

Financially, Cooper's position “dramatically” improved in 2009 “when compared to the extreme challenges facing us in 2008,” he said.

The company posted an operating margin of 5.9 percent in 2009 after reporting substantial losses in 2008. Cash flow improved to a year-end balance of $427 million from $247 million in 2008.

Looking at legislative issues in North America and worldwide, Mr. Armes said these will affect the tyre industry and its players going forward.

In addition to challenges in the US, the industry faces global regulatory issues including clean oil legislation, noise regulation requirements, government protectionism in various forms and environmental legislation that can affect how tires are made, distributed and disposed, Mr. Armes said.

“These trends typically will add costs or barriers to the ability to compete in different markets,” he said. “Those who can adapt the quickest to the new realities and have the ability to be flexible are usually positioned to benefit over the competition.”

The New England association's convention was held at the Mohegan Sun casino in Uncasville.

To reach Dave Zielasko: dzielasko@crain.com; 330-865-6130.

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