It’s hard to believe that we are at the beginning of yet another New Year. I’m sure you’ve heard/read/experienced that the market for OTR Tires was a little rough last year. Prices were down, inventories were running high, and well, it was pretty much dismal. If you read SotMaTI: 2009, then you know it was expected. I just didn’t know how bad it would look when it showed up.
Construction
Sayonara, 2009. And thank God for it. Now, if you read the 2009 report, you know that I made some far-fetched predictions. One thing that I predicted (and honestly, anyone could have seen this one coming) was the horrible year for the domestic Construction market. I also said that I was skeptical about shovel-ready projects . Sure enough, they ran into some major hiccups. We still haven’t seen an economic lift from that sector.
In fact, people are so tired of hearing about these projects that they have been placed on this year’s list of banned words. This year, mark my words, you will hear Commercial Real Estate bailout, TARP II, and outrage, discussed on every nightly news show from here to Hong Kong. That’s because the CRE sector is headed for bust-town. There isn’t a bank around that’s freely lending for new projects…Why? Essentially, commercial loans are coming due, and banks are too afraid to refinance owners.
There is a huge glut of commercial real estate sitting empty. Guess what? Nobody is going to be able to get a loan for new office space, if the existing space remains unfilled. Oh, and if you do manage to get your project financed, you’re going to pay more to borrow the money. Interest rates will rise with the increased risk, regardless of where the Fed keeps the base rate.
What about hotels? Well, that’s a problem too. The hospitality industry has taken a beating over the past year. Decreased business spending, along with travel have made Vegas change its advertising to be more business oriented. Gone are the days of “What happens in Vegas, Stays in Vegas.” People eventually figured out that “What happens in Vegas, appears on your Visa bill, and costs you 30% APR, each month.”
What does this mean for the tire market? Here in the US, small construction companies are going to be looking at cheaper tires, or delaying purchase even longer. They’ll be eyeing retreads and used tires, before they go looking for a new tire. My guess is, heavy equipment rental places will see their business decline as well. Unless, and this is, unless…construction companies believe it will be cheaper to divest themselves of equipment en-masse, and rent equipment by the week to do a job.
Are there any bright spots in the market for construction this year? If there are any, they won’t be widespread or located in the US. Internationally, the Chinese have to keep construction going. They’ve built completely empty cities, just to keep their population employed. They have to get rid of those Greenbacks somewhere. Who knows what Dubai will do this year? Our favorite citizen in the UAE opened the unfinished Al Burj to save a little face after they defaulted on $60 Bln in debt(…and yes, that was a default on their obligations, regardless of what the financial community at large says.) At any rate, the construction boom in Dubai is long gone, and its not coming back anytime soon.
Mining
On to the mining markets. Well, things are just dandy if you are a gold mining company. I’ve heard expenses for mining my second favorite metal in the $400-900 range this year. Gold is still over $1100 an ounce, even as the USD gains strength(although, that strength is very relative. Something about the EU leaving Greece to fend for itself.) Metals are still through the roof. Copper, at this writing, is still trading above $3.30 an ounce, whilst stockpiles continue to rise. Aluminum and Nickel prices are doing the same, even though their stockpile levels are at 5 year highs. What gives?
I’m not a metal expert here, so I’m going to take a couple of wild guesses:
- Our currency is growing weaker.
- China is exchanging their Treasury Notes for commodities.
That’s it. I know you must think I’m some nutjob, doomer fruit-loop. The only difference between me, and the financial celebrities on the business channels, is that they are paid to be wrong…*cough*Jim Cramer*cough*.
My predictions for the mining sector are positive this year…but cautiously so. I read an article the other day( and I can’t find the source now) that showed mining companies were able to raise $18 Billion last year. Barrick used $5 Bln of that money to close their hedge book, which shorted the very asset they produce. They just couldn’t afford to keep losing money on that bet. That leaves $13 Bln that will make its way into the mining ecosystem.
Demand for Gold and Silver will continue to increase this year. Some have said we will live through another Gold rush, like we did during the early 80’s. Others say we are headed for a depression worse than the 30’s. Regardless of who is right, we are going to see precious metals prices rise by 20%( those are no-brainer, hyper-conservative numbers) over the next year. This means mining stocks will gain traction, and the AUS Dollar, and CAN Loonie are going to appreciate against the dollar.
A New Shortage?
Now, some are already talking about another OTR Shortage by early Q3 of this year. That may be a bit premature. If such a thing did occur, it would be short-lived. All the major manufacturers increased capacity during the first shortage, Double Coin expanded its product offerings, and hopefully, everyone learned a thing or two about how things shouldn’t be handled, the last time around. If manufacturers aren’t investing in a little bit of extra inventory, then they are being short-sighted, yet again. Come to think of it, a longer-term shortage could be in the offing.
Will supplies tighten? Yes. Will margins get a little better? Yes. However, there isn’t a hot construction market siphoning supply this time around. Mining will be a bright spot on the balance sheet this year, regardless of whether you are a manufacturer, or dealer. The question now is: “How bright?” and “Will it be enough?”
Agriculture
On to agriculture. Last year was pretty good for tractor and ag tires. Ag is not our specialty, so I’ll leave this article to explain how the experts expect the ag market to play out. While last year was good for the tire segment, it was a miserable year for crop yields. This next article is rather long, and requires the liberal addition of salt. While their conclusions may be a bit wild, the data looks reasonably solid. In fact, if the numbers are half as bad as what they are saying, it might be wise to consider buying a few extra dry goods. Farmers will be working overtime to make up for the shortfalls experienced last year. I’ve never tried eating rubber for dinner, but I much prefer a steak. If we don’t have a bumper crop this year, it may not matter how many tires get sold.
Passenger and Medium Truck
The passenger market is up in the air this year. At some point, people are going to have to replace the tires that are running bald. According to the RMA, 11% of all cars are running on at least one bald tire. Whether they replace them because of an accident, a flat, or common sense, those tires will have to be replaced, and reasonably soon.
With more manufacturers keeping inventories light, I expect trucking to continue down the dismal path it was on last year. This article sheds a little more light on the challenges that freight networks will continue to experience this year. Fuel costs will be one of the X-factors this year, and any major price spikes will throw the tire business under the bus, along with other industries.
Conclusions:
Mining will be at the forefront of profitability this year. Agriculture will do reasonably well, while construction will continue to suffer. Metals, precious and otherwise, will continue to rise, as systemic financial weakness comes out in its hideous glory. Passenger tires will benefit when consumers can’t afford to delay replacement any longer. Medium-truck tire volume will decrease.
Of course, all these predictions go out the window if someone decides to call Iran’s bluff, or if some guy gets by security with an exploding fanny pack. Hopefully, this year is a better one for all industries, and uneventful, with regard to disaster. I’d like nothing better to than to report I was wrong about every negative thing I said, when next year rolls around.
My words in parting this week: Keep hope alive, your head down, and a blanket nearby. This year is starting out cold.
Stay tuned for the latest news affecting the tire and mining industries.
Until next time, we’ll be…
Signing off…
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