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Status of the Earthmover Tyre Market

April 2007 (V4)

Compiled by: Tony Cutler, Technical Manager

Also refer OTRACO report: Status of EM Tyre Market – June 2004

G L O B A L T Y R E M A N A G E M E N T

Technical Paper

OTRACO Status of the EM tyre market – April 2007

TABLE OF CONTENTS 1. Glossary .................................................................................................................1 2. Introduction............................................................................................................3 3. Overview................................................................................................................3 4. Global tyre market – all product groups ................................................................5 5. Global tyre market – EM tyres only ......................................................................6

5.1 EM tyre manufacturers & distributors .................................................................7 5.1.1 Established manufacturers ............................................................................7 5.1.2 Newcomer manufacturers .............................................................................8

5.1.2.1 Tyre life performance, operational and safety issues.............................9 5.1.2.2 Maintenance issues ..............................................................................10 5.1.2.3 Supply chain and related issues ...........................................................10 5.1.2.4 General.................................................................................................10

5.1.3 Tyre distributors..........................................................................................10 5.2 EM tyre factories................................................................................................11

5.2.1 Large haultruck radial tyre factories ...........................................................11 5.2.2 Other EM tyre factories ..............................................................................11

6. Global economic growth......................................................................................12 6.1 Mine product demand and prices.......................................................................12 6.2 Shipping consequences ......................................................................................13

7. Demand for EM tyres...........................................................................................13 7.1 Mining equipment production............................................................................14 7.2 Haultruck tyre demand.......................................................................................14

8. Supply of EM tyres ..............................................................................................14 8.1 Raw material supply ..........................................................................................15 8.2 Tyre production expansion ................................................................................15

8.2.1 Tyre production increases to date ...............................................................16 8.2.2 Planned tyre production increases ..............................................................16

9. Supply/demand interaction for EM tyres.............................................................18 9.1 EM tyre shortages ..............................................................................................18

9.1.1 Otraco model of EM tyre supply & demand...............................................18 9.2 EM tyre pricing pressures ..................................................................................19

9.2.1 Manufacturing input costs...........................................................................19 9.2.1.1 Freight and import duty .......................................................................20 9.2.1.2 Raw material costs ...............................................................................20 9.2.1.3 Material price and substitution.............................................................21 9.2.1.4 EM tyre manufacturing cost model......................................................21

9.2.2 Ex-works cost versus onsite tyre price........................................................22 9.2.3 EM tyre supply contracts & pricing............................................................24

10. Conclusions......................................................................................................24 10.1 EM tyre shortages and manufacturers..............................................................24 10.2 EM tyre pricing and warranty ..........................................................................25

11. Recommendations............................................................................................25 11.1 Tyre selection...................................................................................................26 11.2 Tyre maintenance.............................................................................................26 11.3 Tyre operation..................................................................................................26


11.4 Tyre awareness.................................................................................................27 11.5 Tyre supply agreements ...................................................................................27 11.6 Mine and fleet optimisation .............................................................................28 11.7 Alternatives to EM tyres ..................................................................................28

12. References and Sources ...................................................................................29 APPENDIX 1 – EM TYRE MANUFACTURERS & DISTRIBUTORS ...................30

Appendix 1A – Major EM Tyre Manufacturers’ Radial Tyre Sizes .......................30 Appendix 1B – Major EM Tyre Manufacturers’ Bias Ply Tyre Sizes.....................30 Appendix 1C – Major EM Tyre Manufacturers’ Websites .....................................30 Appendix 1D – Minor EM Tyre Manufacturers ......................................................30 Appendix 1E – EM Tyre Distributors of Newcomer Brands ..................................30

APPENDIX 2 – EM TYRE MANUFACTURER & DISTRIBUTOR QUESTIONNAIRES ...................................................................................................36

Appendix 2A – Manufacturer Questionnaires .........................................................37 Appendix 2B – Distributor Questionnaires..............................................................47

APPENDIX 3 – OTRACO MODEL OF EM HAULTRUCK TYRE SUPPLY & DEMAND....................................................................................................................51

Appendix 3A – Otraco Model Assumptions & Comments .....................................52 Appendix 3B – Announced EM Tyre Production Expansions ................................53 Appendix 3C – Otraco Model Projections...............................................................54

APPENDIX 4 – OIL, DERIVATIVES & RUBBER PRICING..................................61 APPENDIX 4A – Pricing for Oil and its Derivatives..............................................62 APPENDIX 4B – Pricing for Natural and Synthetic Rubber ..................................62


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1. Glossary EM tyre Earthmover tyre. EM tyres range in size from 12.00x24 to 59/80R63 (the largest EM tyre in

terms of weight is a 70/70x57).The term EM tyre is typically used in Australasia.

OTR tire Off-The-Road tire – interchangeable with the term EM tyre. The term OTR tire is typically used in North America. Tyre and tire are the

British and US influenced spellings, respectively. Tyre manufacturer The company that makes the tyre, eg. Bridgestone

Corporation. Big-3 The three main global tyre manufacturers (in terms of all tyre

product groups, and of the EM tyre product group) – Bridgestone, Michelin and Goodyear.

Tyre brand The name, branded onto the sidewall of the tyre, by which the

tyre is known, eg. Bridgestone. Apart from Chinese brands (with some exceptions) the brand name

usually reflects the name of the company of manufacture. Many Chinese manufacturers make two or more brands of otherwise identical tyres; eg. Haohua South China (Guilin) Rubber Co Ltd makes the Torch and Evergreen brands of EM tyre.

Tyre distributor A company that sells the tyre to the end user. The three major manufacturers, Bridgestone, Michelin and Goodyear, and

to a lesser extent Toyo and Yokohama, typically sell their tyres directly. The smaller and emerging manufacturers tend to use third party distributors, although there are exceptions in both cases.

Tyre size The size designation of a tyre, eg. 40.00x57, 59/80x63. For 40.00x57, 40.00 refers to the nominal width of the tyre (inches), and

57 to the rim diameter (inches); tyres using this size convention have a nominal aspect ratio (the ratio of tyre height to tyre width) of 1, where tyre height is the nominal height from the tyre bead to the tyre tread face.

For 59/80x63, 59 refers to the nominal width of the tyre (inches), 80 to the nominal aspect ratio (0.8), and 57 to the rim diameter (inches).

The x is a generic size indicator (the tyre could be a either radial or bias ply construction); to specify radial construction, x is replaced by R, eg. 59/80R63; to specify bias ply construction the x is replaced by – , eg. 40.00-57.

Tyre construction Tyres are typically made in one of two constructions: Radial

ply or Bias ply. The radial design is more technologically advanced and provides higher

tyre life (typically 30-40% more than bias ply life), lower operating cost per hour (or kilometre) and lower fuel consumption. The tyre industry moved from bias ply to radial tyres for passenger cars in the 1960s, road truck tyres in the 1970s, haultruck tyres in the 1980s and large wheel loader tyres in the 1990s. The radial construction process is more complex and tyre building equipment is more expensive – this was the hurdle to more widespread conversion from bias ply to radial tyre construction of


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mainstream EM tyre sizes in the mid 1980s. Michelin has always manufactured tyres solely in radial construction; of the seven other major EM tyre manufacturers at that time, only two (Bridgestone and Goodyear) adopted radial construction for their major EM sizes, effectively creating the “Big-3” – Bridgestone, Goodyear and Michelin.

Radial construction Radial ply EM tyres are typically constructed from a single ply

made of steel cord that forms the casing of the tyre, with the steel cords being oriented radially from bead to bead. The tread area of the casing is wrapped with several steel belt cords oriented circumferentially. The belts closest to the casing, termed working belts, are integral to the construction of the tyre, while the outer one to three belts are protective in nature. The casing is attached to the two beads, each of which comprises a single bundle of steel cords.

Bias ply construction Bias ply EM tyres (also referred to as Cross ply, X-ply or

Conventional construction tyres) are constructed from a multi-layered casing (or carcass) of nylon plies, with each successive layer set at a bias of approximately 90 degrees to its mate. Several protective “breaker” belts of nylon plies (steel belts are sometimes used) are positioned in a circumferential orientation between the casing and rubber of the tread. The casing is attached to the two beads, each of which comprises several bundles of steel cord.

Medium haultruck For the purposes of this paper, defined as haultrucks of 90 to

<140mt (metric tonne) / 100 to <155T (short ton) payload capacity.

Medium haultrucks typically use 27.00x49, 31/90x49 or 30.00x51 tyres. Large haultruck For the purposes of this paper, defined as haultrucks of

140mt / 155T payload capacity and larger. Large haultrucks typically use 33.00x51, 36.00x51, 37.00x57, 42/90x57,

40.00x57, 46/90x57, 50/90x57, 53/80x63, 55/80x63 or 59/80x63 tyres. Ultra-class haultruck This is an industry accepted term referring to large haultrucks

of 270mt / 300T payload capacity and larger. The largest ultra-class trucks are currently of 360mt / 400T capacity.

Ultra-class haultrucks typically use 50/90x57, 53/80x63, 55/80x63 or 59/80x63 tyres.


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2. Introduction This report is an update to Otraco’s June 2004 report, entitled Status of the EM1 Tyre Market. In that report Otraco predicted a global shortage of tyres and substantial price increases, both of which have come to pass. This update includes details on the many alternative manufacturers and suppliers who have emerged since the global shortage of EM tyres arose in early 2004 and the implications of using these tyres to supplement, or replace, the established (traditional)2 brands. It also includes the predictions of Otraco’s model for EM haultruck tyre supply and demand through to 2010. While the main focus of this paper relates to EM radial tyres used on medium to large haultrucks3 – 90 metric tonne (mt)4 payload capacity and bigger – aspects concerning other EM tyres are examined where there are particular concerns at present (eg. suitability of alternative brand tyres of bias ply construction). The following areas are discussed:

• Global tyre market size and supplier share • Newcomer manufacturers and distributors • Influences on tyre supply and demand • Outlook for EM tyre supply and demand to 2010 • EM tyre manufacturing cost inputs and pricing • Recommendations related to current tyre supply and demand

Recent EM tyre technical developments are referred to where they relate to market issues; however they are generally outside the scope of this paper and are not examined in detail. The same applies to developments in tyre retreading and, to a lesser extent, tyre repairing, notwithstanding the fact that both have garnered considerable interest over the past three years. All figures quoted in this report are in US dollars and may vary from data published in other sources depending on exchange rates used for currency conversions. The latest available full-year tyre sales figures comparing all global tyre suppliers are for calendar year 2005 (over a year out of date).

3. Overview Demand for EM tyres has increased dramatically since early 2004 due to hugely increased demand for commodities – particularly minerals such as iron ore, copper, nickel and bauxite, and energy products such as coal. The demand for these commodities has been driven mainly by China and, to a lesser extent, India and Russia.

1 The term EM (Earthmover) refers to all tyres fitted to off-highway mining and construction equipment, including underground mines. An alternative term is OTR (Off The Road) – the term EM tends to be used in Australasia and OTR in North America. EM/OTR tyres generally range in size from 24” to 63” rim diameter. 2 We regard the traditional brands as Bridgestone, Michelin, Goodyear, Toyo, Yokohama and (to a lesser extent) General and Pirelli. 3 Haultruck tyres typically account for 80% of mining company expenditure on EM tyres. 4 Approximately 100 short ton (T) capacity.


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The demand for EM tyres since 2004 has not been matched by an equivalent increase in tyre supply. This has led to tyre shortages (progressively worsening since 2004 to the present) and tyre price increases for the mining industry. Otraco predicts that EM tyre shortages will become more severe during the current year and early next year, before starting to ease in late 2008, but with supply shortfalls probably continuing to 2010. EM tyre manufacturing division profit margins, which had eroded from 1997 through to 2004, have since increased substantially but, according to Otraco’s tyre manufacturing cost input model, remain well below the levels of the mid-1990s, at least for the established brands. The established brand manufacturers, who generally distribute their products directly to the end user (although this does vary by global region), have shown considerable constraint in terms of tyre pricing over the past three years. The mining industry has worked hard over since 2004 to reduce demand for new tyres by increasing tyre life (eg. through improved mine conditions and better mine equipment operator tyre awareness) and by new or expanded tyre repair and retread programs. Some mines have increased average tyre life by 30% or more during this time, and this has allowed them to ride out the supply crisis to date – even though, in many cases, mining production has expanded to take maximum advantage of increased commodity prices. Large, established mines, with formal tyre supply contracts with traditional tyre manufacturers, who have made significant tyre life gains, are generally weathering the storm. It is the new mining projects, particularly in the case of junior miners, who are having the greatest difficulty in sourcing tyres. The same applies to equipment manufacturers who are finding it almost impossible to provide established brand tyres as original equipment on their machines. A large number of new EM tyre manufacturers (in excess of 50 – mainly from China, Europe and India) have emerged since 2004. Of these, approximately 15 make tyres of up to 40.00-57 (to suit 220mt payload capacity haultrucks); however none currently makes this size tyre in radial ply construction – only in bias ply – although the first of these newcomer 40.00R57 radial tyres will become available by year end. Some of these newcomer brands, eg. Belshina, have been manufacturing EM tyres for many years; however they have become widely available globally only during the current supply crisis. Once supply and demand stabilises, most of these new manufacturers will quit the industry; nevertheless the big hurdle to entering the market (capital and timeline) will make leaving in lean times difficult as well. It is also very likely that one or two of the emerging manufacturers will supplement/replace some of the existing established manufacturers. While there are now many new brands to choose from, most of their product is of bias ply construction, and most manufacturers are still in the product development stage – which is typically two to three years for bias ply tyres and three to four years for radial tyres and for tyres used on the largest haultrucks and wheel loaders. As a rule of thumb, bias ply tyre average life is approximately 70% of that of the equivalent radial tyre made by the same manufacturer where production quality and product development level are common for both constructions (bias ply and radial). However, minesites around the world are routinely experiencing bias ply tyres from the newcomer manufacturers, particularly Chinese brands, averaging only 10% of the life of Big-3 radial tyres operating in the same application – due to a lack of manufacturing quality and/or product development pedigree.


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So basically, for the shortfall in supply of each mature, established brand radial tyre, a mine may require between 1.5 and 10 alternative brand bias ply tyres to replace it in terms of tyre life equivalency. Otraco is tracking the relative performance of a considerable number of newcomer specification tyres on the sites that we manage and consult to. We are currently compiling a questionnaire to send to mines worldwide to seek information in relation to the relative performance5 of newcomer brands being operated on the respective sites. We will publish a supplement to this report once this data has been compiled and analysed. Apart from new manufacturers, there are many newly emerged EM tyre distributors – selling new, used, repaired and retreaded tyres, as well as tyre casings for retreading. Some of these sellers have viewed the current supply crisis as a means of making fast profits and have charged exorbitant prices for both new and used tyres – prices approaching US$200,000. However these price demands are becoming less common as availability of the newcomer brands improves, and will disappear when supply and demand imbalances settle. And finally the industry is seeing alternatives to pneumatic EM tyres. Polyurethane tyres are currently being trialled on at least one minesite on a large haultruck. There is still much development work required, both in the design and manufacture of these, or alternative material, tyres and in the progress of more sophisticated truck suspension systems that will almost certainly be required to make non-pneumatic tyres viable.

4. Global tyre market – all product groups In 2005, the year for which the latest global tyre sales figures6 are available, the global tyre market grew 9% to US$101 billion. Three companies – Bridgestone, Michelin and Goodyear – accounted for 53% of this total, with the ten largest manufacturers representing 77% of the market. Bridgestone Corporation took the top spot replacing Group Michelin which had held that position for the four years to 2004. Bridgestone tyre sales grew 11.6% to US$18.3 billion during 2005, assisted by a small change in the yen/dollar exchange rate. Michelin sales grew just 3.6% to US$17.9 billion with negligible influence from the euro/dollar rate during the year. Goodyear sales increased 6% to US$17.5 billion. Continental, Pirelli, Sumitomo, Yokohama, Hankook, Cooper and Kumho took placings from four to ten, respectively, with Toyo being relegated to number 11 in 2005 (refer Figure 1). The figures above are for all tyre sales and include subsidiary companies of the respective manufacturers. Of the 75 top companies, 17 are Chinese, nine are Indian, eight are US and five are from each of Japan and Taiwan. The number of tyre factories in China grew from 62 in 2000 to 81 in 2005 while in the US the number fell during this period from 53 to 47; in Japan it remained at 23 and in France it reduced from 22 to 18.

5 We will also include a section on safety related incidents associated with these newcomer brands. 6 Global Tyre Report 2006 published by the European Rubber Journal (ERJ).


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Global tyre industry (US$101B)Manufacturers (all industry segments)

Kumho1.9%

Other21.3%

Toyo1.8%

Hankook2.5%

Yokohama2.9%

Cooper2.1%

Goodyear17.3%Continental

6.3%Pirelli4.5%

Sumitomo3.6%

Bridgestone18.2%

Michelin17.7%

Figure 1: Global tyre market by manufacturer – 2005 sales (Source: ERJ)

5. Global tyre market – EM tyres only The tyres that are of most interest to us comprise only a small part of the global tyre industry. EM tyre sales make up approximately 6% of the total global tyre market (refer Figure 2).

Global tyre industry (US$101B)All segments

EarthmoverUS$6.1B

6%

Tw o w heel5%

Agricultural2.5%

Aircraft0.5%

Passenger car & light truck

59%

Heavy truck (highw ay)

26%

Figure 2: EM tyres as a percentage of total tyre market – 2005 sales


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Tyres for large haultrucks of greater than 140mt payload capacity constitute only 16% in value of the total EM tyre segment (refer Figure 3). Approximately US$970 million is spent per annum on these large haultruck tyres – less than 1% of annual global tyre sales. At the end of 2005, North America remained the major market for large haultruck7 tyres, followed by Australasia, South America, Africa, Asia and Europe. The demand for ultra-class (270mt and larger) trucks and tyres continues to grow relative to smaller haultrucks, with copper mines (in Chile, USA and Indonesia) being the major user of ultra-class trucks, followed by coal mines (in USA, Australia, Indonesia and Colombia) followed by oil sands operations (in Canada).

Earthmover tyres (US$6.1B)Large haultrucks vs. rest

Other earthmover equipmentUS$5.1B

84%

Large haultrucks

(140mt & larger)US$970M

16%

Figure 3: Large haultruck tyres as a percentage of the EM tyre market – 2005 sales

5.1 EM tyre manufacturers & distributors

5.1.1 Established manufacturers Until early 2004, three tyre companies – Michelin, Bridgestone and Goodyear (the Big-3) – comprised 95% of the medium-to-large8 haultruck sector. That figure has now reduced significantly with the emergence9 of newcomer manufacturers from (mainly) China, Europe, India and Malaysia. The mainstream products of the Big-3 are of radial ply construction which is more technologically advanced – providing higher tyre life and lower operating cost per hour – than bias ply construction. 7 Haultrucks of 140mt payload and larger. 8 Haultrucks of 90mt payload and larger. 9 Some of these manufacturers have been making EM tyres for many years; however they have become widely available globally only during the current supply crisis.


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Appendix 1 provides information on EM tyre manufacturers, including tyre brands, sizes and constructions available from the major manufacturers. Prior to the late 1990s Bridgestone had the lion’s share of the large haultruck market. The release, at that time, by Michelin of its XDR – a deeper tread (E4+) – specification tyre gave Michelin the lead in terms of tyre life performance. This, together with the opening of their second giant tyre manufacturing plant at Lexington in the USA saw Michelin grabbing additional market share. The trend continued with the introduction of ultra-class trucks, with Michelin being the life-performance and market leader in the 63” tyre size from the outset; although Bridgestone have now substantially narrowed this gap. The availability of Bridgestone’s VRDP (E4+) specification four years ago has seen Michelin and Bridgestone running neck and neck life performance wise, with almost equal dollar share of the haultruck tyre market. Goodyear remains approximately half the size of either in terms of haultruck tyre sales. Goodyear has also developed an E4+ specification but only to the 37.00R57 size (to suit 190mt haultrucks), not for the 40.00R57 size (to suit 220mt trucks) which is the largest haultruck size that Goodyear produces. Goodyear’s two-piece 45R57 tyre (equivalent to the traditional one-piece 40.00R57 size), developed several years ago, has not gained widespread acceptance. Otraco believes that there have been three main reasons for this: its pricing was initially (and remains) too high; Goodyear has not devoted sufficient resources to resolve development issues, and supply has been limited and irregular. Only Michelin and Bridgestone10 produce tyres for the very biggest haultrucks – ultra-class trucks of 270mt capacity and larger. Ultra-class tyres range in size from 50/90R57 to 59/80R63 – the largest haultruck tyre currently available. Second tier established manufacturers are Toyo and Yokohama, with the largest sizes produced being restricted to 37.00R57 radial ply and 40.00-57 bias ply, respectively. Third tier established manufacturers are General, who produce mainly bias ply tyres (up to the 33.00-51 size) and Pirelli who produce up to the 24.00-35 size.

5.1.2 Newcomer manufacturers The major change seen in the supply side for EM tyres since early 2004 has been the dramatic increase in the number of new manufacturers and in the global distribution of non-traditional brands. Belshina, a Belarus manufactured brand, has been producing 40.00-57 bias ply tyres since the 1980s. They made some sales into western markets (mainly North America) from the mid-1990s but never gained significant acceptance. However there would not be a major mine globally who has not now heard of (and at least considered purchasing) Belshina tyres over the past three years. Similarly there are a number of Chinese brands that have been manufactured in medium to large haultruck tyre sizes for a decade or more – but which have been sold almost exclusively to mines in China and other Asian countries. These include Ax, Henan, Tianli, Torch, Triangle and Tutric.

10 It appears increasingly unlikely that Goodyear will commit to ultra-class tyre production.


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EuroTire is a new brand but not without heritage. It is manufactured in the Ukrainian factory that was once the design centre for Belshina tyres – although there is now no commercial affiliation between the two brands. Ceat and MRF are Indian manufacturers of tyres ranging in size to 18.00-33, and Simex (with 51% equity by Continental) makes tyres of up to the 33.00-51 size in Malaysia. In all, Otraco has identified more than 50 newcomer manufacturers (producing 70 different brands of EM tyre) – with at least one factory in each of Belarus, Ukraine, Malaysia, Italy, Romania, South Africa and South Korea, two factories in India and the rest in China. However the product of all of these factories, at least in the larger haultruck tyre sizes, is almost exclusively of bias ply construction – as opposed to radial ply construction used by Michelin, Bridgestone and Goodyear for their mainstream haultruck tyre production – and is limited to a maximum size of 40.00-57. The largest radial tyre produced in a newcomer brand is currently 33.00R51, although radials of up to 40.00R57 will become available later this year. There are no plans, as far as Otraco is aware, for the production of 63” tyres (bias ply or radial) by any newcomer manufacturer within the next two years. Otraco recently compiled a questionnaire and sent it to each of the newcomer manufacturers and distributors that we have been able to identify and obtain email contact details for. Appendix 2 contains the completed questionnaires of all the manufacturers and distributors who responded; these provide information on tyre brands and sizes and, in some cases, production quantities, and plans for the future production of new sizes and radial specifications.

5.1.2.1 Tyre life performance, operational and safety issues

There are three factors affecting the life performance of newcomer brands tyres. The first is that the majority of these tyres at present are of bias ply construction which has a maximum tyre life potential typically only 70% of that of radial tyres. The second is that many newcomer brand tyres are still in the development phase (it generally takes two to three years to iron out most of the design/manufacture problems with a new specification bias ply tyre), so premature failure will tend to be more prevalent than for mature specification tyres. A third factor is that quality control for some of these newcomer brands is not going to match that of the established manufacturers. The potential consequences are low tyre life, operational constraints and safety issues. Many newcomer brand bias ply tyres are averaging only 10% of the life of Big-3 radial tyres – mainly due to inadequate manufacturing quality, technical expertise and/or product development time. If a mine has a supply shortfall of say 10 established brand tyres for the year, and can only replace these through the supply of newcomer brand tyres, then it may need 100 of these tyres to provide equivalent budgeted operating hours (or kilometres). Bias ply tyres do not have the load and TKPH rating of equivalent compound radial tyres. Therefore load and speed control is generally more critical with bias ply tyre operation to minimise the incident of low-life heat related failures.


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Reports of near new tyre blowouts11, often on haultruck front positions and without any indication of rock damage or other operational factors, are becoming increasingly common. Unless there is reasonable confidence in the manufacturing integrity of newcomer brand tyres we recommend that they be fitted to the rear axles of trucks, loaders and dozers.

5.1.2.2 Maintenance issues

Bias ply tyres are more difficult to dismount from rims because they have a substantially wider bead foot than radial tyres. Whereas radial tyres can usually be dismounted without the need for an EM tyre press, one may be required for bias ply tyres, creating additional cost12 and logistical issues. Bias ply tyres do not tend to retain inflation pressure as well as radial tyres because there is more bead movement, and hence potential for air loss at tyre/rim interface, with bias ply tyres. Pressure maintenance checks and pump-ups may therefore have to been conducted more frequently on bias ply tyres. Radial tyres are far more amenable to successful sidewall repairs than bias ply tyres. So if sidewall damage is a problem on site then this needs to be given consideration.

5.1.2.3 Supply chain and related issues

Purchasing tyres from non-traditional sources, whether they are manufacturers or distributors, can bring associated challenges such as pricing, warranty and reliability of delivery issues. There are also reports of counterfeit tyres – the most recent being a Chinese manufacturer stamping his tyres with the brand name of local competitor.

5.1.2.4 General

Buyers need to be cognisant of the potential issues discussed above when purchasing newcomer brand tyres, especially if these brands are going to comprise a substantial proportion of the buyer’s tyre usage requirement.

5.1.3 Tyre distributors Third party distributors currently play a much greater role in tyre supply than they did several years ago. The majority of the newly emerged distributors are selling newcomer brand and/or second hand tyres. Many sell established brand tyres as well; some are authorised agents for tyre manufacturers and others are middle-man distributors. Appendix 1 provides information on some distributors for newcomer brand EM tyres. There are a lot of dynamics in the tyre distribution sector, with new distributors still entering the market on a daily basis, prices being amended to reflect the change in supply and demand interaction over time, and distributors varying their product mix to suit prevailing market factors. For example there is a large number of reportedly good-condition, half-worn ultra-class (63”) haultruck tyres being offered for sale at present. Rumour has it that some of these tyres are being removed early by end users with the sale proceeds funding new tyre purchases. If this is so, then we predict quick intervention by the sole two manufacturers of this tyre size range, Michelin and Bridgestone.

11 Blowouts are also termed as tyre bursts or impacts. 12 A large EM tyre press could cost US$150,000 or more to purchase and install.


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5.2 EM tyre factories

5.2.1 Large haultruck radial tyre factories There are only five EM tyre factories, worldwide, that produce radial tyres for large haultrucks13 (refer Figure 4).

Figure 4: EM radial tyre plants for large haultrucks These five factories are:

• Bridgestone’s Shimonoseki plant in Japan • Michelin’s Vitoria plant in Spain • Michelin’s Lexington plant in USA • Goodyear’s Topeka plant in USA • Goodyear and Toyo’s14 Tatsuno plant in Japan.

Of these, only four factories produce the most widely used15 large EM tyre size – 40.00R57 – that is run on 220mt16 haultrucks; the Tatsuno plant makes tyres only up to the 37.00R57 (190mt17) size. Only three, the Bridgestone and two Michelin factories, produce 57” and 63” tyres for ultra-class haultrucks. All five plants also make radial (and in some cases bias ply) tyres for large loaders and auxiliary mining equipment.

5.2.2 Other EM tyre factories Yokohama and Belshina have been making bias ply large haultruck and loader tyres of up to the 40.00-57 size for 220mt capacity haultrucks for decades at their Onomichi Japan and Bobruisk Belarus plants, respectively. Bridgestone/Firestone has a factory in Bloomington

13 Excluding Belshina which now makes a 33.00R51 radial tyre, and several companies (including the EuroTire, Ax, Torch, BIW-TZ and Resource brands) are planning to produce 40.00R57 radial tyres in 2007/08. 14 This is the Nippon Giant Tire joint venture among Goodyear (65%), Toyo (30%) and Mitsubishi. 15 In dollar terms, not necessarily in quantity. 16 240 short ton. 17 210 short ton.

Michelin Lexington factory, South Carolina, USA

Michelin Vitoria factory, Spain

Bridgestone Shimonoseki factory, Japan

Goodyear/Toyo Nippon Giant factory, Tatsuno, Japan

Goodyear Topeka factory, Kansas, USA

up to 40.00R57 size

up to 59/80R63 size

up to 37.00R57 size


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USA that produces tyres of up to the 70/70-57 size (the world’s biggest tyre18) for 73mt capacity loaders. Apart from these well established factories, there has been a proliferation of new and or expanded factories that manufacture bias ply tyres for large haultrucks and loaders – notably in China (approximately 25 plants) and Ukraine (one plant). For smaller EM tyre sizes the number of factories worldwide exceeds 70, including the Big-3 manufacturer’s facilities in Japan, Brazil, Luxembourg and USA; most of the rest are located in China, with the remainder in India, Malaysia, Italy, Turkey, Romania, South Africa, South Korea and elsewhere.

6. Global economic growth The catalyst for increasing EM tyre demand and prices at present is the expanding global economy. China has accounted for about one-third of the growth in the world economy over the past six years. The country’s seemingly insatiable demand for raw materials has reshaped the commodities market and created a boon for the mining industry. There has been much debate as to how long this growth will continue and whether the “bubble will burst”. What is almost certain is that growth will be sustained until at least after the Beijing Olympics in August 2008, and that while it may reduce substantially post-Olympics, it is likely (although not certain) that Chinese aspirations will maintain a level of demand for mining product that is significantly higher than pre-2003 levels.

6.1 Mine product demand and prices China’s Gross Domestic Product (GDP) has been growing at more than 10% annually for the past decade. It has created enormous demand for consumer and construction raw materials as well as energy products. Figure 5 shows the effect that this growth in demand has had on mine commodity prices. The chart assumes a price base index of 100 in 2001 for six mine products: iron ore, gold, coal, nickel, aluminium and copper. Apart from nickel, and to a lesser extent gold, prices remained relatively constant through to 2003. Since then, price increases from the 2001 base have ranged from a 100% increase for aluminium, to a 300% increase for copper, to a 600% increase for nickel.

18 The 70/70-57 tyre (designed for the LeTourneau L-2350 front end loader) is 3.73m diameter by 1.73m width and weighs 6,800 kg. The 59/80R57 (designed for the Caterpillar 797B haultruck and suitable for the Liebherr T282B and Terex MT6300 haultrucks) has a larger diameter, 4.03m, but a width of only 1.48m and a weight of 5,300 kg.


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Commodity Price Indices 2001-2007 (2001 base of 100)

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Iron OreGoldCoalNickelAluminiumCopper

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Figure 5: Commodity price growth 2001 to Mar 2007

6.2 Shipping consequences The Chinese boon to the mining industry also produced a logistical nightmare for the shipping of ores and concentrates, and getting materials and equipment to build and operate new mines. Sea-freight demand increased dramatically in 2003 and reached record levels during August 2005 to January 2006, leading to increases in both shipping rates and delays. Logistical efficiency was the shipping industry’s biggest stumbling block; the focus over the past three years has been to expand shipping terminal hours, hire more stevedores, and improve in-terminal efficiency – mainly through increased electronic processing of cargos19. Many new port facilities have been built and previous facilities enlarged, especially in China. China has also built dozens of new shipyards, including the world’s largest in Shanghai, to supplement the main freighter producing shipyards in Japan and Korea. Generally, the global shipping situation is now much improved compared with 2004 and 2005, although port infrastructure for the export of mine product remains a major problem in some regions – the Australian Bowen Basin and Hunter Valley coal mining ports being notable examples.

7. Demand for EM tyres The increased demand for mining products and commodity price rises since late 2003 have led to an expansion of existing mines, reopening of closed mines, and the development of 19 The conversion from manual to electronic processing, voluntary in the past, is now becoming mandatory in many countries


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new mines. Mine production has increased through improved productivity of existing mining equipment and the purchase of new loaders and trucks to expand mine fleets and to equip new mines. Increased mine production has placed pressure on the supply of all service related commodities – including original equipment (OE) tyres for the new mining equipment and replacement tyres for existing machines. The equipment most needed to generate increased mine production are loaders and haultrucks, and hence it is for loader and haultruck tyres that demand has increased so dramatically over the past three years, especially in the larger sizes – for loaders of 33mt and larger bucket capacity and for haultrucks of 140mt and larger payload capacity.

7.1 Mining equipment production Mining equipment manufacturers are enjoying record sales at present for all classes of mining equipment. The biggest in terms of revenue, and in terms of its influence on EM tyre demand, is for medium to large haultrucks. Global sales of haultrucks20 of 90mt capacity and larger increased from a figure of well under a 1,000 units in 2003 to more than 1,110 units in 2004, to almost 1,700 units in 2005 and approximately 1,800 units in 200621. The current year is expected to see another record output – the equivalent to providing 13 new fully operational Escondida, Freeport or Bingham Canyon mines. There is also a trend towards larger, particularly ultra-class, haultrucks. Most of these sales have added to rather than replaced the existing global truck population.

7.2 Haultruck tyre demand Each new haultruck requires six tyres before it is commissioned22 and another six replacement tyres typically before it has completed its first year of operation, with six more being required, typically, every eight to 10 months. That translated to 10,800 tyres of 27.00x49 size or larger required for new haultruck sales in 2007 and an additional 13,500 replacement tyres being required in 2008 just to service the new trucks sold during 2007. At the current rate of mining equipment sales, global tyre requirements are increasing by 8.5% annually. Otraco estimates that the 2008 global tyre requirement23 for haultrucks of 90mt capacity and larger will exceed 115,000 tyres.

8. Supply of EM tyres The primary limiting factor affecting tyre production volume remains factory output capacity, not raw material supply – although raw material prices have increased substantially over the past five years.

20 From Western mining equipment manufacturers. 21 Source: Mr Peter Gilewicz of The Parker Bay Company. 22 Original equipment manufacturer (OEM) demands for original equipment (OE) tyres can no longer be met by the established tyre manufacturers. Most buyers now purchase new mining equipment without tyres and provide the tyres from their own site stocks. 23 This figure includes original equipment and replacement tyres.


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8.1 Raw material supply The main raw materials used in EM tyre production are natural rubber, synthetic rubber, carbon black, steel and processing chemicals. For a large radial haultruck tyre the approximate proportion of these raw materials, by weight, is as shown in Table 1.

Material Proportion by weight Natural rubber 35%

Synthetic rubber 25% Steel wire 20%

Carbon black 10% Other (processing chemicals, etc) 10%

Table 1: Proportion of material by weight in a large radial haultruck tyre Rubber is the main component of a tyre and approximately 90% of global natural rubber annual production is used for tyre manufacture. The three main sources of natural rubber, are Thailand, Indonesia and Malaysia. The major sources of synthetic rubber are USA, Japan and China.24 General world demand for many of the raw materials used in tyres (eg. rubber, oil and steel) has risen substantially since 2002. Once again China has played a major role. Apart from its enormously increased use of steel since 2001, it became the world’s largest consumer of natural rubber in that year and the largest overall rubber user (combined consumption of natural and synthetic rubber) the following year. In spite of these developments there appears to be no substantial concern from the three major EM tyre producers (Michelin, Bridgestone and Goodyear) that there will be any significant problems sourcing materials for tyre production, at least in the short term. However, the increased demand for tyre raw materials has lead to hefty price rises for these materials and has created considerable additional pressure for higher tyre prices. This is discussed in detail in section 9.

8.2 Tyre production expansion A general rule of thumb for EM tyre manufacturing facilities is that it takes two years to expand or build a factory, and five years to get a return on capital. A single segmented mould, used to contain and shape a tyre during the vulcanising stage of manufacture, may cost as much as US$3 million and yet process just one tyre per day. EM tyre manufacturers, at least the Big-3, will not make this investment commitment lightly. This, reinforced by memories of what happened to EM tyre manufacturing sector profitability following the push by mining corporations for global purchasing programs in the late-1990s is the major reason for EM tyre supply having trailed demand for this product over the past three years. During the two years prior to June 2004 tyre companies invested US$2.8 billion in new and expanded tyre manufacturing facilities worldwide. However, almost none of this expansion investment was associated with large EM tyres – it was for light vehicle tyre plants and, to a lesser extent, to factories producing small EM tyres.

24 Global demand for rubber by all users (not solely for tyres) is in the order of 40% for natural rubber and 60% for synthetic rubber.


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A very significant reason for tyre companies channelling the majority of their investment funding into small tyre production at that time was because their profit margins were very much higher in that segment of the market compared with the EM tyre segment. Prior to mid-2004 the last major expansion of facilities producing large EM tyres, apart from the opening of Michelin’s Lexington factory in 1998, was during the 1999 to 2002 period by Michelin (at its Lexington and Vitoria plants) and Bridgestone (at its Shimonoseki facility) to allow production of 63” tyres for the new ultra-class haultrucks being introduced at that time. Both Michelin and Bridgestone continued to make modest increases in production capacity to meet increased demand for 63” tyres. Goodyear’s only expansion in relation to large EM tyres had been the expansion of their facility in Topeka in 2003 to produce the new two-piece 45R57 tyre for 220mt haultrucks. Details of recent tyre company production increases, since June 2004, and planned future expansion are discussed in the following sections.

8.2.1 Tyre production increases to date Bridgestone completed a significant expansion of its Japanese Hofu plant in late 2006 almost doubling the output of small EM tyres (up to 21.00R35). To date there has been only marginal production expansion by Bridgestone and Michelin for larger tyre sizes – most has been through the installation of additional tyre curing presses – at Shimonoseki Japan in the case of Bridgestone, and at Lexington USA and Vitoria Spain for Michelin – to bring these factories up to maximum production capacity. Almost all of this extra capacity has been for the 63” and 57” sizes. Goodyear has made no investment in additional large EM tyre output apart from improvement in factory efficiencies during 2004. The same applies for the second and third tier established manufacturers – Toyo, Yokohama, General and Pirelli. Virtually all other expansion in production in EM tyre sizes up to the 51” size (ie. to 36.00-51), and a substantial proportion of the increase in 57” (mainly 40.00-57) output can be attributed to the newcomer manufacturers, mainly in China and Eastern Europe.

8.2.2 Planned tyre production increases Michelin has a major new EM factory coming on line at Campo Grande in Brazil in late 2007 that will have an initial output of 40,000 tonnes per annum producing 25” to 49” tyres25. It has also committed to a 50%26 increase in output from its Lexington USA plant – mainly benefiting 63” production, with some increase in 57” output but minimal for 51” (and other) sizes. This additional production is planned to begin in mid-2008. Bridgestone has announced a 20% increase in output from Shimonoseki from mid-2008. This will benefit mainly 63” production, but also that for 33”, 49”, 51” and 57” sizes. In January this year, Bridgestone committed to a new large/ultra large EM tyre factory near to its existing Shimonoseki plant. This will be Bridgestone’s first new tyre factory in Japan in more than 30 years. Plans are for construction to begin in late 2007 with production commencing in the second half of 2009, and full output of 11,000 tonnes per annum by the 25 This will be give Michelin five plants globally for the production of EM tyre sizes up to 49”, in addition to the two plants (Vitoria and Lexington) producing 51”, 57” and 63” tyres. 26 Output from tyre factories is typically measured in terms of rubber consumption – not in the physical number of tyres. The 50% expansion figure is based on Lexington’s June 2006 output level.


17

second half of 2010. Bridgestone will allow for expansion of this facility should the need arise in the future. The 11,000 tonnes annual capacity (by late 2010) of this new factory represents approximately 20% of Shimonoseki plant capacity as at mid-2006. Michelin is also considering several new EM tyre production projects which are all currently subject to approval and finance. They include future expansion of both Lexington and Vitoria and of the new Campo Grande plant. None of these potential tyre production increases have been included in Otraco’s model results presented in Appendix 3, nor in the chart depicted in Figure 7. Goodyear has made no announcements, nor do we expect it to do so, in relation to future expanded output for its EM tyre range. Toyo has also been quiet on the subject as have General and Pirelli. Yokohama is expanding its Japanese Onomichi factory – the expansion commenced in November 2006 with planned completion in 2009 – providing almost 50% increase in production from 13,200 to 19,500 tonnes per annum, mainly in the 25”, 33” and 35” radial specifications. Belshina, in Belarus, has announced plans to produce radial tyres by the end of 2009 in the following sizes: 21.00R35, 24.00R35, 27.00R49, 33.00R51 and 36.00R51. They have made no announcement on 40.00R57 radial tyre production. EuroTire, in Ukraine, plans to produce 40.00R57 radials by March 2008 at a rate of 4,800 tyres per annum. Magna, Chinese made with Netherlands design input, plans to produce 27.00R49, 33.00R51 and 40.00R57 radials in quantities of 1,200 tyres per annum in each size. Timing has not been announced. Pingan-Hiflex, Chinese made with Australian input, plan to produce a 40.00-57 bias ply tyre by mid-2007. Shifeng Double Star/Ax, in China, will introduce a range of haultruck radial tyre sizes from 27.00R49 to 40.00R57 by November 2007. Guilin/Torch, in China, plans to be producing 40.00R57 tyres by the end of this year. Qingdoa Taifa/BIW-TZ, in China, will be making 37.00R57 and 40.00R57 radials by November 2007. XTIRE/Ziggurat, in China, plans to manufacture 57” and 63” tyres, although no timing has been stipulated. Resource, in China, intends making radial tyres ranging from 24.00R35 to 40.00R57 by 2009. Apart from XTIRE/Ziggurat, no company has announced plans to manufacture 63” ultra-class haultruck tyres – a size range duopolised at present by Michelin and Bridgestone, and produced by them in radial construction only.


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9. Supply/demand interaction for EM tyres Demand for EM tyres is exceedingly flexible while the supply side is quite inelastic. The current increased demand for EM tyres, in the absence of an equivalent rise in tyre production, has manifested itself in two major ways:

1. Tyre supply shortage, and 2. Tyre price increase.

9.1 EM tyre shortages The last time that severe EM tyre shortages were experienced, in the mid-1990s, haultrucks had to be parked up on blocks on some minesites. The opening of Michelin’s USA Lexington plant in 1998 eased the supply situation at that time. The current situation has greatly surpassed the severity level of the mid-1990s. Following the release of our June 2004 report Otraco undertook investigations to predict the likely scenario of EM tyre supply and demand for the coming years. The result was the chart shown in Figure 6.

Haultruck Tyres 49" to 63"

Jan 2003 Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009

Tire Supply Unchecked Demand Modified Demand

Factory inefficiences eliminated & Supplier

stocks run down

Factory marginal production increases

Otraco's projections in Apr 2005

What could be achieved through

industry-wide 25% tire life improvement

Chinese demand driven increase in

mining rates & equipment fleets

What will be the state of the

industry here?

Figure 6: Otraco’s April 2005 qualitative estimate of EM tyre supply and demand

9.1.1 Otraco model of EM tyre supply & demand Since then, Otraco has developed a supply and demand model for medium to large haultruck tyres (ranging in size from 27.00x49 to 59/80x63) into which we factor haultruck annual production, from which original equipment and replacement tyre demand can be modelled, and tyre factory existing and future expansion production figures which allow us to model EM tyre supply. The results of this model, together the assumptions upon which the model is based and tyre factory expansion information, is contained in Appendix 3. A chart approximating the interaction between supply and demand and highlighting the main supply-side influences is depicted in Figure 727. 27 In Figure 7, MI represents Michelin and BS represents Bridgestone.


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Haultruck Tyres 49" to 63"

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We are HERE

MI: New Brazil plant output (to 49")

MI: approx 50%* increased output from Lexington USA plant (51", 57" & 63")

BS: approx 20%* increased output from Shimonoseki Japan plant (49", 51", 57" & 63")

Chinese & European manufacturers: ongoing increased output

BS: New Japanese plant commences production; approx 20%** increased output for giant sizes (49", 51", 57" & 63")

* Compared with mid-2006 production from this plant

** Compared with mid-2006 production from this company

Figure 7: Otraco’s April 2007 quantitative28 estimate of EM tyre supply and demand The results shown in Figure 7 and in Appendix 3 could vary significantly if Otraco’s assumptions do not reflect real-world developments – particularly in relation to haultruck sales from 2007 to 201029 and additional tyre output that we have based on tyre company announcements (refer Appendix 3B for details).

9.2 EM tyre pricing pressures We have seen the free market supply and demand mechanisms holding sway over the past three years. The current situation of higher demand for EM tyres, without an equivalent increase in supply, has driven up tyre prices (just as these same mechanisms, working in the opposite direction, were associated with the dramatic reduction in EM tyre prices in the late 1990s). The simultaneous substantial rises in raw material prices have fuelled this tyre price inflationary pressure.

9.2.1 Manufacturing input costs The cost of a tyre ex-works is determined by three manufacturing inputs: raw material costs, conversion costs and services and administration costs. Table 2 shows the approximate weighting of each of these three manufacturing inputs30 in the ex-works cost of a large radial haultruck tyre – before the addition of the profit component to set the ex-works price of the tyre.

Manufacturing input Cost weighting (Apr 2001) Raw material costs 40% Conversion costs 40%

Services and administration costs 20%

Table 2: EM tyre manufacturing inputs weighting in ex-works cost (excluding profit) 28 Based on Otraco’s global EM tyre production and usage model and the assumptions that we have input to this model – refer Appendix 3. Note that this chart does not include allowance for the additional production expansions being considered by Michelin as discussed in section 8.2.2. 29 Otraco has assumed that haultruck global sales will remain at the 2006 level (approximately 1,800 trucks) for each of 2007 and 2008 and then reduce to 1,200 trucks in 2009 and 800 trucks in 2010. 30 Otraco has reviewed these input cost weightings, published in our June 2004 tyre market status report, and believes they are representative of current EM tyre manufacturing costs. We estimate raw material costs to comprise 35-40% of the ex-works cost (excluding any profit component) of an EM radial tyre (Michelin has quoted a figure as high as 46%).


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9.2.1.1 Freight and import duty

Apart from excluding any profit component, the manufacturing inputs shown in Table 2 also do not take account of any freight, handling or import duty costs associated with transporting the tyre from the factory to its place of use. Freight and handling costs may add as much as 15%, or more, to the ex-works tyre price. Import duty usually depends on the agreement between the country of export and the country of import. For example tyres originating from the USA or Spain have received a concession of 6 percentage points in Chilean import duty, benefiting Michelin, and USA made Goodyear tyres over Bridgestone Japanese made tyres. Several countries have recently negotiated, or are in the process of negotiating, a free trade agreement with China which will give a pricing advantage to EM tyres being imported from any of the newcomer Chinese manufacturers.

9.2.1.2 Raw material costs

The increased demand for raw materials used in tyre manufacture has led to sharp rises in the price of these materials over the past two years. The price of natural rubber in 2006 reached almost US$2.50/kg far surpassing its 1995 peak of US$1.50/kg, after having fallen to less than US$0.60/kg during the intervening years (refer Appendix 4).

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Figure 8: EM tyre raw material input cost index – Mar 1990 to Mar 2007 Figure 8 shows the influence of individual raw material prices on the overall weighted average cost of raw materials31 used to make a large radial haultruck tyre (eg. a 40.00R57 tyre as used on 220mt haultrucks) for the period from March 1990 to March 2007.

31 Data used to produce the graph in Figure 8 is based on US Department of Labor commodity price indices – all based on US dollar prices (with no adjustment for the value of money over time nor for seasonal influences). Tyre raw material composition by weight, used to calculate the relative weighting of individual materials on the


21

Since June 2004 natural rubber has increased in price by 78%, carbon black by 32%, synthetic rubber and steel by 26% and other processing chemicals used in the manufacture of tyres by 37%. Overall, the weighted average price of raw materials needed to produce EM tyres has increased by almost 50%. About 40% of an EM radial tyre’s weight is composed of petroleum based products – the two main ones being synthetic rubber and carbon black. While the price of carbon black has reflected the oil price over the past three years, there has not been a strong correlation between the price of oil and that of synthetic rubber (refer Appendix 4); nevertheless if the price of oil continues to rise then this will put additional pressure on tyre pricing.

9.2.1.3 Material price and substitution

Several points are evident from Figure 8. Natural rubber has had the greatest influence on combined raw material costs – partly because of its relatively high price by weight and partly because it is the major single ingredient of a haultruck tyre. It has also exhibited by far the most volatile pricing of the five raw material groups. As the price of synthetic rubber has not increased in line with natural rubber prices (refer Appendix 4), one may think that there would be considerable temptation, in order to keep manufacturing costs down, to substitute synthetic rubber for natural rubber. In fact, the bull run of natural rubber prices over the past five years, in contrast to the general stability of synthetic rubber prices, has not been accompanied by any substantial increase in demand for synthetic rubber at the expense of natural rubber. This is because the two rubber types have very distinct properties. Natural rubber has advantages in relation to heat build-up, mechanical properties, green (pre-cured) tackiness and strength, and cure rate; however it is more susceptible to aging and oil damage and reversion during vulcanisation, and is more permeable to air. The main use for natural rubber is in the production of tyres, particularly haultruck tyres where heat resistance is of far greater importance than for most other tyre product groups – such as passenger, commercial, aircraft, etc. Some limited substitution of synthetic for natural rubber is possible for non-earthmover tyres, although with a resultant trade-off in product quality. However the scope for substitution is, at present, almost non-existent in the manufacture of EM tyres.

9.2.1.4 EM tyre manufacturing cost model

The graph in Figure 9 is based on an EM tyre manufacturing cost model developed by Otraco. Figure 9 depicts, on a monthly basis for the period March 1990 to March 2007, the combined effects of raw material, conversion and services/administration input costs32 on the ex-works cost index of a large radial haultruck tyre produced in the USA. All input costs are based on US dollars33. final tyre material cost in Figure 8, is as shown in Table 1 and was based on figures provided by Goodyear and Michelin. 32 The graph of Figure 9 is based on the input cost weightings shown in Table 2 being applicable as at March 2007. These cost weightings may vary over time as one input cost (eg. raw materials, presently) assumes a greater relative weighting over another. 33 In the case of raw materials, these costs have not been adjusted for the value of money nor for seasonal influences


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EM Tyre Input Costs

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Figure 9: EM tyre manufacturing inputs cost index – Mar 1990 to Mar 2007 Conversion and services/administration costs are assumed to vary over time in line with the US consumer price index34. A base index of 100 has been set for the ex-works cost at December 1996, which was prior to the development of EM tyre global purchasing agreements that are now widely used by large mining companies. Figure 9 shows that raw material costs, together with conversion costs, are the main tyre manufacturing cost factors. The volatility of natural rubber prices (refer Figure 8) is clearly evidenced in the final ex-works tyre cost. Similar graphs could be developed for Japanese and Spanish manufactured tyres (and for newcomer brand tyres being manufactured in China, Belarus, Ukraine, India and Malaysia). The raw material costs and their variation over time should be almost identical to the figures we have used for the USA made tyres. There may be some differences in the case of conversion and services/administration costs; however we consider that the overall picture would be similar for tyres produced in all these countries.

9.2.2 Ex-works cost versus onsite tyre price Figure 10 compares the indicative historical US dollar price of a Big-3 manufactured and distributed 40.00R57 tyre versus the ex-works (USA) cost index for such a tyre, for the period March 1990 to March 2007. The tyre price variations shown in this graph for the past 17 years are indicative only. Absolute tyre price and the magnitude and timing of price changes will have varied

34 US city average – all items with no seasonal adjustment.


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considerably from mine to mine depending on a multitude of factors such as mine purchasing clout, supply agreement periods, exchange rates, freight charges, import duties and the like. Mines that have not had the benefit of a purchase agreement with one of the traditional established tyre manufacturers, and who have had to purchase tyres from one of the newcomer manufacturers, or from a third party distributor, may be paying prices significantly higher (several times higher in the worst cases) than that shown in Figure 10. The current price of a 40.00R57 tyre purchased from one of the Big-3 manufacturers under a supply agreement is similar to that for the same tyre purchased in 1996 prior to the introduction of global purchasing contracts initiated by the major mining corporations. Over the intervening years tyre prices initially dropped substantially due to global agreement terms and conditions dictated by the mining companies. In 1999, when EM tyre supply capacity greatly exceeded demand, some mining corporations obtained tyre price cuts in the order of 15-20%. However, since 2004 the dramatic increase in tyre demand has pushed prices past those previous levels.

EM Tyre Price vs. Input Cost

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Figure 10: 40.00R57 tyre price vs. ex-works cost index – Mar 1990 to Mar 2007 What is clear from Figure 10 is that while tyre manufacturers have clawed back tyre prices, the hefty rise in raw material and other input costs means that the EM tyre manufacturing sector has still not returned to the profit level that it enjoyed in the early-1990s. What is also obvious is that the traditional established EM tyre manufacturers have exhibited notable responsibility and restraint in the face of profit gouging by some of the new manufacturers and many third party distributors.


24

9.2.3 EM tyre supply contracts & pricing The preference of the majority of the established manufacturers is to have long term supply agreements with established mining companies, in which the buyers commit to minimum purchase quantities, and where tyre pricing reflects changes in tyre cost inputs – particularly raw materials and production costs. It has taken a while, but three of the established manufacturers – Michelin, Bridgestone and Yokohama – have now committed, or are in the process of committing, substantial investment funds to expanded output of EM tyres. A system of guaranteed sales and fair pricing will provide a lower risk environment for tyre manufacturers that should benefit the mining industry.

10. Conclusions

10.1 EM tyre shortages and manufacturers The enormous increase in demand for EM tyre since early 2004 has generated a myriad of new manufacturers – most of them Chinese. It has also generated a market for second hand tyres and created a large number of new distributors selling new and used tyres. Notwithstanding this, the increase in tyre production output to date has been insufficient to meet demand. Raw material supply has not been a factor, nor is it likely to become one, in limiting tyre supply. Insufficient expansion of tyre production capacity has been the cause for the shortfall in tyre supply compared with tyre demand since 2004. Otraco believes that the tyre shortage situation for large EM tyres will become more severe later this year and into 2008 before easing in late 200835 as significant additional tyre output from Bridgestone and Michelin comes on line. Depending on what happens in relation to commodity demand, mining equipment sales, and the further expansion of tyre production facilities (Michelin’s decision on potential projects currently under consideration could be a key factor), it is possible that tyre demand will still exceed supply capacity into 2010. Tyre conservation and supply agreements are critical elements of any plan to weather the storm, along with mine and fleet optimisation and the search for potential alternatives to the use of EM tyres. Mining companies who have obtained commitments from suppliers to provide a quantity of tyres this year similar to what they received last year, and who have increased average site tyre life through improved tyre management, should be able to continue, or expand, operations with minimal problems. New mining companies, or those who do not have adequate supply contracts or who have not made tyre life improvement inroads on site, may not be in such an enviable position. What occurs with EM tyre demand in the longer term will depend mainly on the world economy – largely influenced by China. While world demand for commodities remains high, commodity prices will be buoyed and, in the absence of a matching level of EM tyre production, tyre shortages will continue and tyre pricing pressure remain high.

35 The supply situation for smaller EM tyres, up to 27.00R49, should ease in early 2008 following the completion of Michelin’s Campo Grande plant in Brazil.


25

As supply and demand stabilise we expect that there will be several new key players who may very likely replace some of the past established manufacturers. However, we should not underestimate the time it takes to develop and mature an EM tyre specification – a minimum two to three years for bias ply tyres and three to four years for radial and ultra-class specifications. There are big hurdles to entering the EM tyre manufacturing sector and to expanding existing facilities. They are capital expenditure and the time frame to generate revenue and to achieve project payback. However these hurdles also make departure difficult when times are lean.

10.2 EM tyre pricing and warranty All the pressures at present are for an increase in EM tyre pricing. Raw material prices are rising dramatically, and tyre supply has not, to date, expanded sufficiently to meet the rise in demand for EM tyres that the industry has experienced over the past three years. It is a classic supply and demand cycle – one with flexible demand and inflexible supply. Tyre prices will continue to rise while demand outstrips supply and while raw material prices continue their upward spiral. A significant number of these new manufacturers and distributors have also seen the current market situation as one suited to quick profit taking. The third party market for new and used tyres remains dynamic – the incidence of ridiculously high pricing tends to be reducing, but now we are seeing an influx of used 63” tyres being offered for sale and the spectre of counterfeit branding. Tyre companies have used the same argument (supply versus demand) that has been successfully used by mining companies against them during the late-1990s, and they have seen the past three years as an opportunity – not just to recoup their costs, but to claw back some of the profits they lost towards the end of the 1990s decade. Some of Otraco’s clients, particularly the larger mining houses that had gained good price considerations from tyre suppliers during the late 1990s, were apprehensive of being early casualties as the tyre shortage situation worsened during 2004 – because tyre supplier profit margins were lower on their minesites compared with those on mines paying considerably higher tyre prices, and they believed that the tyre suppliers might provide tyres preferentially to the higher priced sites. However Otraco’s prediction in 2004 that where tyre manufacturers had worked hard to win higher tyre allocations with their larger clients, they would not want to risk this for short-term gains, has generally been upheld. Historically, the bigger (more valuable) customers get looked after first. Warranty is also a function of price and demand. Warranty claims (and reimbursements) have virtually disappeared from the scene since 2004. However as supply and demand settle warranties will again become an important element of tyre management.

11. Recommendations EM tyre conservation and the maintenance of adequate tyre supply are the two most important considerations for mining companies, in relation to tyres, at present. Mining companies should also be investigating mining fleet optimisation in terms of tyres, and alternatives to equipment or processes that involve the use of EM tyres.


26

Tyre conservation means maximising site average tyre life in order to minimise the site’s requirement for tyres. The four pillars of tyre management necessary to achieve this are:

• Tyre Selection • Tyre Maintenance • Tyre Operation • Tyre Awareness

11.1 Tyre selection • Review tyre specification selection on site to optimise tyre specification by

application36, preferably based on actual site performance. o There can be 50% difference in life performance between the optimum

specification and an incorrect one. • Carefully monitor the specifications of tyres delivered to site – especially OE tyres

on new equipment if fortunate enough to still be receiving equipment with tyres – to ensure that they are the specifications ordered (and, presumably, the specifications that have been properly determined as being optimum for the site).

• If there is a need to purchase alternative, newcomer brand tyres, be prepared for average tyre life being much lower than that of the Big-3 brands.

11.2 Tyre maintenance • Inflation pressure control is the most important maintenance aspect of EM tyre

operation, in terms of tyre life. Ensure that the highest quality is maintained. • Where possible, fit larger tyres to equipment, eg. for haultrucks, convert 37.00x57

to 40.00x57 fitment, 33.00x51 to 36.00x51, 36.00x51 to 37.00x57, and 27.00x49 to 30.00x5137; for graders, convert 23.5x25 to 26.5x25 fitment.

• Using newcomer brands at present typically means converting from radial to bias ply tyres which have two maintenance related aspects associated with them:

o They tend to leak air (between the tyre bead and the rim) at a greater rate than radial tyres; so more frequent pressure checking and reinflation may be required.

o Because of their much larger and less flexible bead area, bias ply tyres usually necessitate an EM tyre press for dismounting them from a rim.

• Investigate repairing and retreading options in order to maximise overall life achieved from each tyre casing.

11.3 Tyre operation • Improve the design and maintenance standard of haulroads, benches, loading and

dumping areas. • Reduce volumetric overloading of trucks to avoid rock spillage. • Implement TKPH modules on mine management systems (eg. Modular Mining,

Wenco, etc) to reduce the incidence of low-life tyre heat failures – and perhaps allow the change to longer life, more cut/abrasion resistant tyres.

• There are substantial operational implications of using alternative brand tyres, particularly in the bias ply construction – tyre life has been mentioned above. Tyre loading and truck speed must be monitored carefully because bias ply load and

36 Otraco usually regards front and rear tyre operation on a particular haultruck fleet as being different applications. 37 These last two conversions also necessitate a change to a larger diameter, stilted rim.


27

workload (TKPH) ratings are considerably less than that of equivalent specification radial tyres. Safety may also be an issue until sufficient confidence has been gained on site through experience with these tyres; we recommend restricting haultruck, loader and dozer fitments to rear axles until this “trust” threshold has been attained.

11.4 Tyre awareness The vast majority of tyre premature failures are directly attributable to the machine operator.

• Develop a tyre conservation culture on site through training, presentations, wall charts, competitions, etc.

• Review mine operator practices, eg. ban the changing of gear of mechanical drive trucks while travelling loaded up a ramp (to avoid spillage).

11.5 Tyre supply agreements In order to conserve tyres you need to have some.

• Every mining company should have the goal of a long term supply agreement with one, or preferably two, of the Big-3 manufacturers. However the suppliers currently have the upper hand and this goal is not always achievable – particularly for junior miners.

• If it is not possible to obtain a Big-3 supply contract, then use the following general guidelines when negotiating with alternative suppliers:

o Have formal supply agreements rather than relying on spot purchases. o Lock suppliers into longer term contracts, with penalty clauses for non-

supply. o Have at least two suppliers for the major tyre sizes used on site38.

• Accept that significant price increases are likely for EM tyres for at least the next few years.

• Retain material and workmanship tyre warranty terms in any supply agreement, although it has become harder to make claims under material and workmanship warranty provisions, especially where mine site personnel do not have the technical capacity to successfully counter tyre company reasons against reimbursement. While performance39 warranties are almost impossible to obtain at present, retain the potential to re-introduce them as the market settles.

• Remember, if purchasing alternative brand tyres, to factor in potential relative tyre life when determining usage requirements. Also be wary of counterfeit branding – the best way to avoid this is to purchase directly from the manufacturer.

• Monitor, at least on a monthly basis, tyre orders, deliveries, usage and site stocks. Track tyres through the delivery chain. Plan at least five years out in terms of usage requirements and supply.

• Pay particular attention to any requirements for unusual tyre sizes or non-standard compounds.

o A new tyre size for a recently released machine, particularly if there is only one manufacturer of this tyre size, would require special attention in relation to stock requirements.

38 There is often argument over this point (a single supplier versus multiple suppliers) but in Otraco’s experience having multiple suppliers usually reduces tyre shortage risk. It also makes sense from a tyre management viewpoint as competition almost always results in higher tyre life and lower tyre cost per tonne. 39 Otraco believes that best form of warranty is the relative performance system. Under this system each supplier warrants his tyres to match the lowest average tyre cost per hour (or kilometre) result of the best performing brand operated in the same application and over the same period.


28

o The requirement for extra heat or cut resistant tyres40 is often more difficult to fulfil than that for standard compound tyres.

• When in future the situation that we are currently experiencing is reversed and supply dominates demand, learn from the lessons of the past decade and do not gouge EM tyre manufacturers in relation to tyre pricing.

11.6 Mine and fleet optimisation Some types or makes of haultruck are more suited to particular haul profiles from a tyre point of view. Running a haultruck whose weight distribution is biased towards the front axle could be disastrous in a downhill loaded application. Some tyre specifications are optimal for short haul applications while susceptible to low-life premature failure on long hauls.

• Consider assigning truck fleets by mining area (where haulage profiles may be distinctly different on a particular minesite).

• Consider swapping trucks and other mining equipment between sites, if this option is available, in order the optimise equipment fleet tyre operation according to site conditions.

11.7 Alternatives to EM tyres • Review mining and hauling processes used on site – it may be possible to modify a

tyre intensive application to reduce tyre usage, eg. in relation to the increased utilisation of existing shovels/excavators, in-pit conveyors, etc.

• Some minesites, particularly where hauls are long and road conditions are good, may be suited to large road truck/road train applications – there is no global supply constraint whatsoever for tyre sizes used in these applications.

40 In an emergency, it is possible to fit more heat resistant tyres than what is optimum for a particular operation (although tyre operating cost will become considerably higher); however running more cut resistant tyres than optimum could result in low-life heat failures, major disruption to mine production, and zero tyre stock situations.


29

12. References and Sources

• Global Tyre Report 2006 published by the European Rubber Journal (ERJ) – for tyre company revenue and ownership information.

• Tyre manufacturers and distributors through direct discussions,

questionnaires completed by them, catalogues and website information.

• The Parker Bay Company, Mr Peter Gilewicz – for information on

global haultruck populations and annual deliveries.

• Malaysian Rubber Board – for natural rubber pricing.

• US Department of Labor, Bureau of Labor Statistics – for tyre raw materials pricing (excluding natural rubber), consumer price index and producer cost index information.

• Intergroup Shipping (WA) Pty Ltd, Mr Ron Hewer – for information

on global shipping trends.

• Status of the EM Tyre Market, October 2001 published by Otraco International Pty Ltd, compiled by Mr Bernd Tamsen.

• Status of the EM Tyre Market, June 2004 published by Otraco

International Pty Ltd, compiled by Mr Tony Cutler.


30

APPENDIX 1 – EM TYRE MANUFACTURERS & DISTRIBUTORS

Appendix 1A – Major EM Tyre Manufacturers’ Radial Tyre Sizes (Established & Major Newcomer Brands)

Appendix 1B – Major EM Tyre Manufacturers’ Bias Ply Tyre Sizes (Established & Major Newcomer Brands)

Appendix 1C – Major EM Tyre Manufacturers’ Websites (Established & Major Newcomer Brands)

Appendix 1D – Minor EM Tyre Manufacturers (Minor/Upcoming Newcomer Brands)

Appendix 1E – EM Tyre Distributors of Newcomer Brands


31


32


33


34


35


36

APPENDIX 2 – EM TYRE MANUFACTURER & DISTRIBUTOR QUESTIONNAIRES

Appendix 2A – Manufacturer Questionnaires Appendix 2B – Distributor Questionnaires

Otraco sent the questionnaire to manufacturers and distributors for whom we had an email address. Not all manufacturers and distributors to whom we sent the questionnaire responded.


37

Appendix 2A – Manufacturer Questionnaires Responses to Otraco questionnaire by Manufacturers of Major Newcomer Brands. Otraco did not send questionnaire forms to any of the Established Brand manufacturers (Michelin, Bridgestone, Goodyear, Toyo, Yokohama, General and Pirelli).

• Uzmai International Sri

Maitech

• Coba Tyre Pty Ltd Coba

• Magna Tyres

Magna

• Hiflex Australia Group / Weihai Pingan Tyre Co Ltd Pingan-Hiflex

• Shifeng Double-star Tire Co Ltd

Ax, Goodluck

• Haohua South China (Guilin) Rubber Co Ltd / Silkroad Tire Co Ltd Torch, Evergreen

• Guangming Tyre Group Co. Ltd

Riverland, Supersonic

• Qingdao Taifa Group Co. Ltd BIW-TZ

• XTIRE Inc

Ziggurat


38


39


40


41


42


43


44


45


46


47

Appendix 2B – Distributor Questionnaires Responses to Otraco questionnaire by Distributors of Major and Minor/Upcoming Newcomer Brands. • Sino Procur

• National Tyres

• Eminentire Inc


48


49


50


51

APPENDIX 3 – OTRACO MODEL OF EM HAULTRUCK TYRE SUPPLY & DEMAND

Appendix 3A – Otraco Model Assumptions & Comments Appendix 3B – Announced EM Tyre Production Expansions Appendix 3C – Otraco Model Projections


52

Appendix 3A – Otraco Model Assumptions & Comments


53

Appendix 3B – Announced EM Tyre Production Expansions


54

Appendix 3C – Otraco Model Projections All relevant tyre sizes • 90 to 360mt trucks: 27.00x49 to 59/80x63 tyres

By tyre size range • 90 to 110mt trucks: 27.00x49 to 30.00x51 tyres

• 140mt trucks: 33.00x51 tyres

• 154 to 190mt trucks: 36.00x51 to 42/90x57 tyres

• 220 to 225mt trucks: 40.00x57 to 46/90x57 sizes

• 290 to 360mt trucks: 50/80x57 to 59/80x63 sizes

Note: The model predicts that 36.00x51 to 42/90x57 supply capacity will exceed demand from 2009 onwards. If this were to eventuate then tyre manufacturers would allocate some production resources from this tyre size range to another size range for which demand exceeded supply.


55

Global Supply Vs Demand - 2700x49 to 59/80x63

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

CY2006 CY2007 CY2008 CY2009 CY2010

Calendar Year

Tire

Qua

ntity

Demand of Equiv Big-3 Radials Supply of Equiv Big-3 Radials Supply of Actual Big-3 Radials

(11,835) (13,294)

(11,265) (7,172) (3,649)

Figure above each column is the surplus or (shortfall) in Supply over Demand of Equiv Big-3 Radials for that year


56

Global Supply Vs Demand - 2700x49 to 3000x51

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

CY2006 CY2007 CY2008 CY2009 CY2010

Calendar Year

Tire

Qua

ntity



(5,880) (6,502)

(3,792) (3,802) (2,296)


57

Global Supply Vs Demand - 3300x51

0

5,000

10,000

15,000

20,000

25,000

CY2006 CY2007 CY2008 CY2009 CY2010

Calendar Year

Tire

Qua

ntity


(2,214) (3,154)

(3,738) (2,683) (1,348)



58


0

5,000

10,000

15,000

20,000

25,000

30,000

CY2006 CY2007 CY2008 CY2009 CY2010

Calendar Year

Tire

Qua

ntity

Demand of Equiv Big-3 Radials Supply of Equiv Big-3 Radilas Supply of Actual Big-3 Radials

(1,272) (530) (553)

1,225

2,645



59


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

CY2006 CY2007 CY2008 CY2009 CY2010

Calendar Year

Tire

Qua

ntity


(1,245)

(1,945) (2,045)

(1,204) (881)



60

Global Supply Vs Demand - 50/80x57 to 59/80x63

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

CY2006 CY2007 CY2008 CY2009 CY2010

Calendar Year

Tire

Qua

ntity


(1,225)

(1,162)

(1,137)

(708)

(1,769)



61

APPENDIX 4 – OIL, DERIVATIVES & RUBBER PRICING

Appendix 4A – Pricing for Oil and its Derivatives Appendix 4B – Pricing for Natural and Synthetic Rubber


62

APPENDIX 4A – Pricing for Oil and its Derivatives (based on a price index of 100 as at January 1990 for each commodity)

Price Index for Oil and its Derivatives

0

50

100

150

200

250

300

350

Mar90

Mar91

Mar92

Mar93

Mar94

Mar95

Mar96

Mar97

Mar98

Mar99

Mar00

Mar01

Mar02

Mar03

Mar04

Mar05

Mar06

Mar07

OilCarbon BlackSynthetic RubberPr

ice

inde

x

Dec 1996 base price index for

oil of 100

APPENDIX 4B – Pricing for Natural and Synthetic Rubber (US cents/kg)

Price of Natural rubber compared with Synthetic rubber

0

50

100

150

200

250

300

Mar90

Mar91

Mar92

Mar93

Mar94

Mar95

Mar96

Mar97

Mar98

Mar99

Mar00

Mar01

Mar02

Mar03

Mar04

Mar05

Mar06

Mar07

Natural RubberSynthetic Rubber

US

cent

s pe

r kg

Documents

Status of the Earthmover Tyre Market - Otraco · PDF fileStatus of the Earthmover Tyre Market April 2007 (V4) ... Global tyre market ... Ultra-class haultruck This is an industry accepted