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11th March 2011

FuelQuestions & Answers

Q. Are we at record diesel fuel prices yet?

A. Unfortunately yes this has been the case for over a month now. On February 1st this year a UK ‘high’ was recorded at 133.38ppl inc vat compared with the previous highest price in July 2008 of 133.25ppl (source, RMI). However by Wednesday 9th March, Petrolprices.com recorded this at 138.12ppl as the national average. Whilst for hauliers buying in bulk the RHA weekly price survey, taken on 11th March this reached 114.20ppl as an average ex vat price (137.04ppl with vat added for comparative consumer reasons).

Q. What about back in 2000 when the country nearly ground to a halt?

A. Diesel fuel peaked around 70ppl ex vat or 85.1ppl inclusive.

Q. How much has diesel gone up since the start of 2010?

A. 21.5% in duty and commercial rises, for the public however this is more as VAT needs to be considered too and so their cost has increased by around 25% ( in January 2010 the RHA average fuel price was 93.96ppl ex vat).

Q. How does the barrel price of oil compare?

A. In 2008 oil reached $142, the highest point this year for end of day price was $116.50 (Brent 02.03.11) – the reason we are paying more now even though crude is still cheaper is because of increased duty (up by 8.6ppl), the addition of the Renewable Transport Fuels

Fuel Facts

We are grateful to the Road Haulage Association for permission to publish the following information. For more details, go to www.rha.uk.net

Fuel accounts for around one third of the running costs of a truck and the price of diesel has reached record levels; in early March, the national average stood at 138.12 pence per litre (ppl). Since the beginning of 2010, diesel has risen in price by 21.5% in duty and commercial rises and the £6+ gallon of diesel is a reality.

For the public, the increase is even higher, at around 25%, as VAT needs to be included. To put this in perspective, back in the year 2000, when the country almost ground to a halt, diesel prices peaked at 85.1 ppl, including VAT. The increase has been particularly steep recently, with diesel rising by 16.64% in a little over four months. The RHA estimates that, over this period, the cost of

running a truck, from fuel price increases alone, has risen by 5.4%. RHA figures say that a 44 tonne artic and trailer will use 7.5 mpg and typically cover some 70,000 miles a year. This equates to a fuel consumption of 42,439 litres (9,333) gallons at a cost today of £48,465 – excluding VAT.

An increase of a penny per litre adds £424 a year to the operating cost of a truck and, since October 2010, that has meant an increase of £6,911 a year to the running cost of each truck.

The haulage and logistics industry (and the motorist) make a major contribution to the UK economy. Fuel usage is 49 billion litres a year (24 bn petrol, 25 bn diesel) and, at the new increased duty rate of 58.95 ppl plus 20% VAT, this raises £34.6 billion for the Exchequer. Incidentally, the UK duty rate for diesel of 58.95 ppl is the highest in Europe, with Germany the second highest, at 40.50 ppl.

11th March 2011

FuelQuestions & Answers

Q. Are we at record diesel fuel prices yet?

A. Unfortunately yes this has been the case for over a month now. On February 1st this year a UK ‘high’ was recorded at 133.38ppl inc vat compared with the previous highest price in July 2008 of 133.25ppl (source, RMI). However by Wednesday 9th March, Petrolprices.com recorded this at 138.12ppl as the national average. Whilst for hauliers buying in bulk the RHA weekly price survey, taken on 11th March this reached 114.20ppl as an average ex vat price (137.04ppl with vat added for comparative consumer reasons).

Q. What about back in 2000 when the country nearly ground to a halt?

A. Diesel fuel peaked around 70ppl ex vat or 85.1ppl inclusive.

Q. How much has diesel gone up since the start of 2010?

A. 21.5% in duty and commercial rises, for the public however this is more as VAT needs to be considered too and so their cost has increased by around 25% ( in January 2010 the RHA average fuel price was 93.96ppl ex vat).

Q. How does the barrel price of oil compare?

A. In 2008 oil reached $142, the highest point this year for end of day price was $116.50 (Brent 02.03.11) – the reason we are paying more now even though crude is still cheaper is because of increased duty (up by 8.6ppl), the addition of the Renewable Transport Fuels

TWGTWGTWGThe NTDA Tyre Wholesalers Group

The Tyre Wholesalers Group (TWG) is the wholesale section of the National Tyre Distributors Association – the trade association for UK tyre dealers and fast-fits – and the name says it all. There are 24 national and regional members of the TWG and it is estimated that we supply around 75% of the car tyres sold on the UK replacement market – that’s nearly 26 million tyres a year, with a value of £900,000,000.

To be successful, the wholesaler has to deliver what the customer wants, when he wants it, but the TWG members do far more than merely deliver product; they pass on information on forthcoming legislation about tyres and are available to offer customers help and advice.

Indeed, the purpose of this newsletter is to keep TWG customers informed about issues that will have an effect on the way that you do business – all part of the service!

National Tyre Distributors Association, 8 Temple Square, Aylesbury, Bucks. HP20 2QHTel: 08449 670707 Fax: 01296 488675 Email: info@ntda.co.ukWebsite: www.ntda.co.uk

Double Whammy Hits Tyre TradeThe recent uncertain economic situation has impacted on all manner of industries and businesses and the tyre industry is no exception. As demand fell, many tyre manufacturers scaled down their production, closing or mothballing plants in some cases.

However, the tyre market is a dynamic and fast-moving business and things can change very rapidly. Peter Harries, Group Executive Director of TWG member Viking International, reflects on the current situation and the outlook facing the tyre trade. Says Peter:

“The credit crunch two years ago led to European vehicle and tyre manufacturers experiencing the quickest and deepest downturn in business that they had ever known. Within a year, and after cutting back on production, they experienced a fairly rapid upturn in business. China, as an evolving consumer market, is importing large numbers of European cars, and the European tyre manufacturers are once again enjoying strong OE demand.

“With two of the coldest winters on record, they are also experiencing high demand for winter tyres, including for the first time, any real demand from the UK market. A capped production capacity means that increased winter tyre production during the spring and summer of 2011, will lead to an inevitable shortage of summer tyres.

“Meanwhile, rising raw material costs (especially natural rubber at an all time high), are most evident in a succession of price increases on tyres produced in China, and have served to narrow the gap between budget and premium tyres. The whole mix is set to result in a year of shortages and price rises.”

Peter’s comments raise a number of points, the first one being that the upturn in demand has not been matched by a similar increase in supply; it is much

easier to shut down a factory than it is to start it up again and the growing gap between supply and demand has led to shortages of some sizes.

The strengthening demand for tyres as original equipment has also had an effect – the manufacturing capacity of a tyre factory is finite and tyres for OE will always take precedence over the replacement market. Not only are tyre manufacturers contractually obliged to supply these, but it does not make commercial sense to antagonise the vehicle manufacturers and possibly jeopardise these hard-won contracts. So, if OE demand rises and there is no extra manufacturing capacity quickly available, then replacement supply suffers.

The Cold Weather Effect

Peter also mentions increased demand for winter tyres and, with recent cold winters, this has grown significantly in many mainland European markets. And not just in mainland Europe, as a combination of two of the severest UK winters for years and a successful marketing and promotional campaign by all sectors of the tyre industry has seen substantial winter tyre sales in the UK, to the extent that many in the industry are saying that “the UK winter tyre market is here to stay”.

These sales would have been even more impressive, had the tyre manufacturers had the stocks available. Once again we come back to the fact that manufacturing capacity is finite, or to put it another way, the manufacturer has to decide on his mix of summer and winter tyres.

SPRING 2011

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Analysts reckon that raw material costs account for between 20 and 40% of annual sales and trying to absorb these costs has become unsustainable, hence the latest product price increases. Says Peter Harries: “As an industry we must manage these shortages and these price changes – and as an industry, we cannot carry these extra raw material costs.”

Most tyre manufacturers have increased prices recently and there are other price hikes in the pipeline, for all types of tyres in all the world’s markets. Most of the planned rises in Europe are in single percentages, but in other parts of the world, double digit increases are not uncommon.

One of the major raw materials in tyres is oil and we all know what has happened to oil prices recently. Apart from affecting manufacturing costs, the rising price of petrol and diesel has significantly increased transportation costs for wholesalers.

Not only have duty and VAT gone up, but the outlook for oil prices is bleak, given the current unstable political situation in parts of Africa and the Middle East. A more detailed analysis of the effect of fuel price rises appears elsewhere in this newsletter (see ‘Fuel Facts’).

Oil is also a major component of synthetic rubber and, in 2010, the price jumped from US$2321 per tonne in the first quarter to $2593 in Q3. One supplier of synthetic rubber raised the price of one of its products on January 1st by US$152 per tonne and warned of a further rise over the next two months “of at least $350 per tonne”.

Will people cut down on their motoring as fuel prices rise, leading to reduced demand for tyres? Peter Harries doesn’t think so, saying: “Statistics may yet prove that recent pump price rises for petrol and diesel mean that fewer miles are being driven. But right now there does not appear to be any less traffic on the roads, so it seems the consumer is prepared to pay these higher fuel costs.”

Motorists Overwhelmingly Support Annual MOTsIn February, The Times ran an article entitled “Pressure grows not to tinker with the MOT”, which included the results of a nationwide survey of 4,200 motorists’ thoughts concerning the MOT test.

Natural Rubber Price (per ton $)

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Tyres are not produced to order – tyres for next winter are made months in advance and the manufacturer has to estimate what demand he feels there will be. Nobody could have foreseen the two spells of severe wintry weather at the beginning and end of 2010 and the result was that stocks of winter tyres were wiped out. These will have to be replenished and, having been twice-bitten, the chances are that retailers and wholesalers will want to increase their stock levels. Once again, if more winter tyres are produced, that means fewer summer tyres.

Raw Material Costs

So it appears that those of us selling tyres might find some sizes in short supply in the coming months, but that is not the only cloud on the horizon, as the industry is suffering under the burden of continuously-increasing costs of raw materials.

Analysts Morgan Stanley produced a report on raw materials for the tyre and auto parts industries, which makes rather gloomy reading. The report begins thus: “Raw material prices are rising at a record pace and are showing no sign of slowing down. Prices of some of the crucial inputs for the manufacturing process of tyres and auto parts (oil, natural rubber, synthetic rubber, steel) have grown by 30% to 100% year on year and already 5-15% year to date.” And this report was published on 9th February.

These costs have been rising for some time and it has got to the point where the manufacturers are unable to absorb them any longer. As Morgan Stanley points out, increased manufacturing costs affect the bottom line and an article in the Financial Times back in October last year warned that tyre prices “will rise, following a 65% jump in the price of natural rubber in the past year.”

The following table shows how much the price of natural rubber has increased:

The survey was commissioned by the MOT Forum, of which the NTDA was a founder member, in order to gauge motorists’ reaction to the announcement by Transport Minister Mike Penning, that he was considering changes to the MOT test to bring the UK into line with Mainland Europe. Whereas in the UK a car has its first MOT test after three years and every year thereafter, in Mainland Europe, the first test is after four years and every other year thereafter.

The Department for Transport’s reasoning is that modern cars are far safer than in the past and that the annual MOT test places a financial burden on motorists. Mr Penning says the DfT is aiming “to strike the right balance” between this burden and safety. However, the results of the survey revealed that a hefty 93% of motorists did not regard the cost of the annual MOT (starting at £54.85) as onerous and a similar figure (92%) favoured the current 311 regime over the European 422 system on the grounds of road safety.

This echoes the thoughts of the MOT Forum, which has warned that a switch to 422 would result in 400 more deaths on the roads each year and up to 40,000 job losses among garage and testing staff.

Not surprisingly, the NTDA was concerned about the effect on tyre-related safety issues, saying: “For some people, the annual MOT test is the only time that their tyres are checked and, if a car passes the MOT test, then many drivers act as though their tyres are legal for another year. A car can pass the MOT with just over the legal minimum tread depth of 1.6mm remaining on its tyres and the thought that a motorist could then drive around for two years before being tested again is frightening.”

Rather than the UK adopting the European model, the NTDA and the TWG believe that European states would do better fall in line with the UK, as this would reduce accident levels. Said a spokesman: “When it comes to road safety, adopting the lowest common denominator is a backward step and, if anything, the MOT test should be tightened up, not relaxed.”

On the subject of safety, the MOT Forum is looking at the current MOT test and will be submitting ideas to government aimed at improving safety, including a new approach to the part played by the condition of tyres in the test.

The subject of whether self-supporting runflat tyres (SSTs) can – or should – be repaired is one which has been the subject of much debate within the tyre industry. Opinions differ among tyre manufacturers, with some saying that they should never be repaired and others saying that a repair can be made, provided great care is exercised in the inspection and actual repairing.

One thing that everyone agrees on is that, if a tyre professional decides to repair an SST, then the responsibility lies firmly with him.

Many tyre dealers are reluctant to accept this responsibility and have a “no runflat repair” policy. The reason is that the thick sidewalls of an SST and the general construction of the tyre makes it extremely difficult to ascertain whether or not there has been secondary damage.

Another factor is that the tyre professional is relying on the honesty of the customer when trying to find out how far – and at what speed – the tyre has been run with no pressure. The temptation to be economical with the truth when faced with a hefty bill for replacement tyre(s) may well prove too much for some motorists.

In the light of this situation, the NTDA carried out a survey of members, which revealed that 70% favoured a “no runflat repair” policy and so the Executive Council decided to recommend to members that runflats should not be repaired.

Regarding the attitude of individual tyre manufacturers towards runflat repairs, the Tyre Wholesalers Group recently issued a poster to all members giving details of the differing advice from several manufacturers supplying runflat units into the UK market; copies are available on request.

NTDA Advises Against Repairing Runflats