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By John Healy

Sell-out rates continued to plummet in April MEANWHILE, COVID-19 BOOSTS DEMAND FOR TIER-THREE PRODUCTS

Our recent conversations with dealers leave us with the view that retail sellout trends have showed decelerating growth over the last two months, with growth rates dramatically lower than what they were during the  rst two months of 2020.

For the month of April, surveyed dealers reported they saw unit sales decline 13.1% compared to April 2019 — entirely the result of the impact of COVID-19 on the supply chain and overall economic environment.

Respondents reported that they saw an 88% year-over-year decrease in demand in April. None reported positive trends for the month, which contrasts with 25% of respondents who said they experienced growth during the same month in 2019.

Our tire demand index was down 90% year-over-year — an 83% drop compared to just one month before.

However, commentary from our contacts indicate that mid-April was the bottom of consumer demand as the weeks since then have seen sequential gains.

We continue to hold the perspective that volumes — in the long run — will be more closely aligned with GDP growth, although the months ahead will likely show an unprecedented decrease in number of units sold, albeit at a decreasing rate of declines.

FLIGHT TO VALUE

Our latest survey of dealers revealed that out of all price segments, tier-three brands have experienced the most growth over the last few months. Based on feedback from respondents, we believe that the resurgence of tierthree brands will likely continue as long as COVID-19-related issues impact the economy.

Our belief is that those consumers who choose to buy tires will opt for value brands in order to preserve cash for other products.  erefore, we are not surprised that tier-three products are experiencing the most demand right now.

However, looking past COVID-19, it is not unreasonable to expect that some consumers will gravitate again to tier-one and tier-two brands.

As for now, given the current environment, we believe that pragmatic consumers will go with what they perceive to be the most functional products at lower price points.

RAWS FELL 25% IN APRIL

Looking closely at the recent trajectory of raw material costs, the cost of materials required to build a common consumer tire fell 25% on a year-over-year basis in April.  is continues the trend of declining raw material prices that began to materialize during the second half of 2019. Since July 2019, costs have fallen every single month, with the exception of December 2019.

Holding current spot prices  at would yield a 25.3% year-over-year decrease in the cost to build a tire during the second quarter of 2020, down 15.2% from last quarter.

Raw material costs during the second quarter of 2020 are expected to fall 19.3% versus the same period last year, while decreasing 8.4% from the  rst quarter of 2020.

Looking at individual components, we note that carbon black has started to see cost pressures subside on a year-over-year basis a er a 1.3% decrease that started this trend in October 2019.  is continues what we characterize as a massive turnaround for carbon black, whose prices had been in double-digit year-over-year growth mode for every month prior to July 2019 — all the way back to the start of 2018.

Crude oil prices, which peaked in April 2019, saw year-over-year, double-digit declines during the months leading up to December 2019, when a cost bump of 21% occurred.

Declines continued in early 2020. In February, oil prices decreased by 8%, followed by a sharp drop of 50% in March and an even bigger decline of 74.1% in April as OPEC and Russia were unable to come to a consensus on oil production levels in the face of severely diminished demand.

Natural rubber prices, of course, are tied closely to oil.  ey fell substantially by 26.7% on a year-over-year basis in April. Synthetic rubber costs have stayed in the negative zone for 13 straight months, year-overyear. And  nally, as discussed in previous installments of this column, the price of fabric, cord and other tire reinforcement components continues to track negatively on a year-over-year basis. ■

John Healy is a managing director and research analyst with Northcoast Research Holdings LLC based in Cleveland, Ohio. Healy covers a variety of subsectors of the automotive industry.

Snapshot of dealers’ PLT tire volumes (year-over-year change)

Feb-19 Mar-19 Apr-19 Feb-20 Mar-20 Apr-20 Average

Increase 57% 45% 54% 35% 29% 0% 41% Flat 22% 31% 17% 30% 14% 14% 29% Decline 21% 24% 29% 35% 57% 88% 30%

Total