The Tires should keep rolling
The boom and bust cycles in the commodity markets has far reaching impact on all corners of global economy. One of the corners that see wild gyrations is the market for "Off-the-Road" tires ("OTR"). These huge tires are fitted onto the wheels of $6 million haul trucks operated by miners. Each truck typically has a 400 ton capacity, or in other words, can carry 400 tons of mud or iron pellets in one scoop.
The tires of those trucking beasts wear off at a quicker rate if there is more mining activity. In such a scenario, miners are anxious to secure supplies of those tiers and are willing to pay any price for it -- as was the case during the OTR tire scarcity in 2007.
During the commodity boom of 20072008, tire manufacturers such as Bridgestone, Michelin and Goodyear began to ration supplies to their biggest customers in the form of a yearly tire allotment. This scarcity was projected to persist till 2011, according to Vikram Sridharan, Research Analyst at Beroe.
However, demand for those tires cratered during the years 2008-2009 as worldwide credit crisis resulted in near-idling of many mines. OTR tire prices fell to its lowest point, leaving manufacturers with excess inventory. The excess inventory, in turn, was absorbed by mining industry in the subsequent years as business activity picked up.
Currently there is just enough supply of ultra large OTR tires to meet demand from major mining companies. Prices of 51", 57" and 63" tires are expected to get tighter in 2014 as global capacities for these tire classes are limited and supply will continue to lag demand until 2015, as per Sridharan's calculation.
The unpredictable and cyclical nature of mining in general and OTR market in particular poses a challenge to procurement managers as they find it tough to accurately forecast market demand. The key to maintaining steady supply of OTR Tires while optimizing spend is to prolong the usage of existing tires and getting maximum value from them. Another option would be to re-tread the tire casing 2 to 3 times that can generate good savings.
Also, mining companies can enter into long term contracts, preferably 5 to 10 years, with major tire manufacturers. This would ensure supply security and cost savings for mining companies.
Source: Adapted from an internal Beroe article titled "Cyclical Nature of OTR Tires" authored by Vikram Sridharan.
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