Rubber Chemicals Remain Tied to Economy

08 December 2003 00:00  [Source: ICB Americas]

Its fortunes closely tied to the automotive market, the rubber chemicals industry suffered through much of 2003, as it had in 2002. With consumer indexes indicating a turnaround, im-provement may be on the horizon, but last year's federal investigation into price fixing in rubber chemicals may yet create more hurdles.

Tire shipments for 2003 are expected to decrease by 1.5 percent compared to 2002 levels as a result of the continuing sluggish economy and a delay in its recovery, says the Washington, D.C.-based Rubber Manufacturers Asso-ciation (RMA). However, a forward leap of nearly 3 percent is expected in 2004, owing to the high rate of light vehicle production, a rebound in the commercial trucking sector and a strengthening US economy. The RMA projects continued annual growth of about 3 percent for total tire shipments through 2008 as the nation's gross domestic product and industrial production index gain momentum.

Applications for rubber chemicals include hoses, belts, sheets and shoe soles, but overall, about 90 percent of rubber chemicals go into automotive applications, with about 70 percent of all rubber chemicals going into tire production. Both the tire industry and the auto industry are very resistant to price increases, producers note.

Overall, the RMA says, the combined original equipment and replacement shipments for 2003 auto and truck categories are projected to decrease by 4.5 million units to nearly 304 million units, compared to 2002's 308.4 million total shipments. By 2008, this figure is forecasted to be roughly 348 million units. "If we continue to see strong sales of these larger vehicles, then you will have a healthier rubber chemicals business," says a market observer. However, the observer adds, because there are longer-lasting tires in the replacement market, fewer newer tires are being built. Seventy-five percent of tire sales represent replacement tires, while 25 percent go to original equipment manufacturers.

Synthetic rubber use in North America was flat in 2002 at 2.22 million metric tons, according to the Houston-based International Institute of Syn-thetic Rubber Producers Inc. (IISRP). Demand is expected to increase moderately by 1.5 percent this year, depending on a turnaround in the North American economy. After 2003, demand is expected to recover through 2007 with an average annual growth rate of 1.6 percent.

However, the industry suffers from overcapacity, says an IISRP representative. One consequence is that the Flex-sys rubber chemicals joint venture (50-50 between Solutia Inc. and Akzo Nobel NV) will cease production at its facility in Nitro, W.Va., by the end of the first quarter of 2004. "The business has been under intense pressure for many years from numerous competitors around the world, and in spite of exhaustive attempts to secure sound financial footing," the company says, "it continues to severely under perform."

Also struggling with money woes, the Goodyear Tire and Rubber Com-pany announced in March that it would be considering the possible sale of its chemical business. Goodyear Chemical provides basic and high-performance polymers, antioxidants, latex and adhesive resins to customers worldwide, with annual revenues of more than $750 million. The company says the decision to explore the sale of the business would not interfere with its daily operations. Goodyear is considered the world's largest tire company.

Meanwhile, class-action lawsuits have been filed against Solutia Inc. and Crompton Corp. A Solutia shareholder has filed suit against the company and two top executives seeking class-action status and damages on allegations they manipulated the company's stock by concealing their involvement in a price-fixing conspiracy. Solutia has responded to the lawsuit, describing it as "ridiculous" and "fully without merit," and vowing a strong defense.

In October 2002, the major rubber chemicals producers received visits from representatives of the antitrust divisions of the US Department of Justice and the European Union. Representatives of the European Commission say that its raids on rubber chemical producers were conducted to "ascertain whether there is evidence of a cartel agreement and related illegal practices concerning price fixing for rubber chemicals" and to investigate "allegations of collusive dealings."

Flexsys, Crompton, ExxonMobil, TotalFinaElf and Bayer AG reported being investigated. Crompton, Flexsys and Bayer are responsible for about 80 percent of the market, according to Little Falls, N.J.-based consultancy Kline & Company Inc. Observers say that these raids are only the beginning of a price-fixing investigation, which can last for a number of years, though an investigation is no necessary indication of wrongdoing.

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