Market outlook: Global synthetic rubber market headed for overcapacity

15 February 2013 09:42  [Source: ICB]

Overcapacity is a familiar story in the petrochemicals industry.

Supply is often built before demand, forcing the higher-cost producers to make difficult decisions.

Car tyres Rex Features

 Rex Features

Oversupply is on the horizon for synthetic rubber market

But what has kept hopes alive when overinvestment has taken place is the strength of demand growth in emerging markets.

In the case of some grades of synthetic rubber, however, overcapacity will combine with the maturing of demand in the key China market, according to a recent ICIS study.

Restructuring seems inevitable as the Chinese and major western producers gain more market muscle at the expense of every- one else.

ENERGY SAVINGS IS MARKET KEY

But it is not all doom and gloom. For instance, the "green" tyre revolution might just deliver strong benefits to polybutadiene rubber. Polyisoprene could also benefit from continued restraints on natural rubber production.

But to start with the bad news first, the downside for polybutadiene, and also for styrene butadiene rubber (SBR), is overcapacity, mainly driven by China as a result of its drive towards self-sufficiency.

"Last year, China had achieved 70% self-sufficiency in polybutadiene, with imports estimated at 300,000 tonnes," said Raymond Seveke, author of the ICIS study, the World Synthetic Elastomers Market 2012, which covers events since 2011 and makes projections up until 2025.

"In the case of SBR (emulsion and solution grades), China's self-sufficiency in 2011 was around 80% with imports at 420,000 tonnes."

CHINA CAPACITY

The supply/demand situation gets worse, unfortunately, as China is set to add a further 1.62m tonnes/year of polybutadiene capacity and 1.17m tonnes/year of both grades of SBR by 2015.

"There is going to be deep world overcapacity, a considerable increase in competition and severe restructuring," Seveke said.

"But there will be high growth rates, especially in emerging markets for solution SBR and neodymium-catalysed butadiene rubber." Germany's LANXESS, South Korea's Kumho Petrochemical and China's Sinopec and PetroChina will see their market positions strengthen in polybutadiene and SBR - and also in butyl rubber, all of which are mainly used in tyres, he added.

OVERCAPACITY IS A CONCERN

Overcapacity is also expected to blight the ethylene-propylene-diene monomer (EPDM) and nitrile rubber sectors, the major application for which is vehicle components.

"I expect a period of strong competition, particularly because of the entrance of Chinese newcomers," said the consultant.

"Another important factor will be the strengthening the market leader LANXESS, through its implementation of a huge 160,000 tonne/year facility in China."

DEMAND PROSPECTS

But he adds that demand-growth prospects in emerging markets look good, especially for hydrogenated nitrile-butadiene rubber.

The problem, though, for all the synthetic rubbers that go into automobiles, is that the previous soaring rates of growth for car ownership in the developing countries may not continue.

In China, for example, vehicle sales surged by 46% in 2009 and 32% in 2010 as a result of the huge post-global financial crisis economic stimulus package, according to domestic auto industry data.

But as a result of stimulus being withdrawn, sales only rose by 2.5% in 2011, and another 4.3% in 2012.

A further factor in the slowdown in Chinese sales growth is initiatives by central and local governments to restrict purchases for environmental reasons.

The environmental factor is likely to inhibit growth in all emerging markets as a result of the impact of existing car ownership levels on air quality and infrastructure, warns Seveke.

Increasingly crowded cities are another challenge for growth identified by the consultant. He thus sees an increasing role for public transport in cities which would, of course, negatively affect the synthetic rubber sector.

POLYISOPRENE

Polyisoprene, another of the synthetic rubbers, faces the same challenge as it is also used in tyres, along with motor mounts, shock-absorber bushings and pipe gaskets.

Synthetic rubber capacityIts other applications include hoses and footwear - in fact, anything where natural rubber can also be used as an alternative. This inter-changeability with natural rubber is where its advantage lies.

"There are multiple reasons why one can be bearish on the future growth in natural rubber production," said Seveke.

"These include soil and climate conditions, competition with other crops, such as palm oil, and the lack of availability of low-cost labour during harvest periods."

Global natural rubber production will only increase by an average of 3.2%/year from 2011-2025, he predicts.

"Rather pessimistic predictions for growth in natural rubber output have been indirectly confirmed by China's plans to add 260,000 tonnes/year of polyisoprene capacity by 2015," he said.

The entrance of Chinese and Indian producers into this sector will challenge the dominance of the Russian players, added Seveke.

SB LATEX

Styrene butadiene latex, which is used mainly for carpet backings, is expected to enjoy reasonable demand growth in 2011-2025.

But Seveke cautions that supply is highly fragmented. There are more than 60 producers globally, with two market leaders - US-based Dow Chemical and Germany's BASF - together controlling 35-38% of the market.

"Because of the fragmentation, I think it is reasonable to expect a rationalisation of the supply structure," said the consultant.

One of the unknowns that confront the industry is the extent of demand growth for green, or low-rolling-resistance tyres.

Green tyres boost fuel economy and improve safety because they are low rolling and have higher abrasion resistance than conventional tyres in wet weather. They also last longer.

Improvements are achieved through what Seveke describes as an "innovative carcass structure" and new compound materials.

Around 10-20% more polybutadiene is needed to make green tyres, compared with their conventional counterparts. However, 5-10% less SBR is required.

Mandated improvements in the performance of tyres might result in a substantial surge in green tyre demand in the west, but globally, Seveke argues that growth is hard to predict as a result of uncertainty over:

  • Price differentials between green and conventional tyres. "This is hard to forecast because of doubts over the impact of the expected huge overcapacity in synthetic rubber," he said.
  • How legislation will further develop.
  • How well the green tyres will be marketed versus their alternative.

And he adds that in emerging markets, where per capita income levels are far lower than in the west, affordability of the more expensive green tyres will be a major factor.

In China, for example, 70% of the population earn less than $10 a day, according to the Asian Development Bank.

Affordability in emerging markets will, of course, have a huge impact on growth in the synthetic rubber sector in general during 2011-2015 - especially given that economic problems in the west do not look as if they are going to disappear in a hurry.

Equally important will be how the sector responds to its overcapacity problem.

WORLD ELASTOMERS REPORT

Information and data used for this article were taken from the annual ICIS study, the World Synthetic Elastomers Market Study 2012.

The World Synthetic Elastomers Annual Study provides an exhaustive review of developments in the supply, demand and trade of global synthetic rubber markets, as well as in changes in technology and prices for those markets. Detailed information on the demand from major end-user market per commodity is also reported. The annual study provides historical data from 2000 and forecasts up to 2025. Find out more about the World Synthetic Elastomers Annual Study


By: John Richardson
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