Tire Manufacturers Facing Tougher Times

Yet another sector of the automotive industry is feeling financial pressure due to the high cost of oil, according to anindustry risk analysis provided by Euler Hermes ACI.

"Nearly 60% of a tire's manufacturing cost is related to oil," explains Tony Clary, risk industry manager for Owings Mills, Md.-based Euler Hermes ACI. "For example, Goodyear -- the largest U.S. tire manufacturer -- has seen its raw material costs increase 16% from last year, which has held back the company's turnaround plans."

The tire manufacturers are being hit from two fronts simultaneously, according to Clary. High raw material costs are coupled with diminishing returns from higher-margin replacement costs as consumers reduce driving due to high gasoline prices and thus the need for these tires.

In the case of Bridgestone Firestone, the company is feeling "less-than-expected demand in the replacement market that, combined with a decline in domestic unit vehicle production, is causing lower shipments", says Clary. Michelin, the world's largest tire manufacturer, is experiencing the same market conditions for the first half of 2006 and expects no change for the rest of the year.

The overall global trend of slower economic growth will continue to impact both the tire industry and well as all others according to Dan North, Euler Hermes ACI chief economist, who points out that the U.S. GDP has been revised to 2.5%. The same is true globally as the EU and Japan have raised interest rates to quell inflation thus slowing economic growth explains North.


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