Global trend toward S-SBR brings uncertainty to BD markets

(Clarifies and recasts seventh paragraph)

HOUSTON (ICIS)–Lanxess recently announced that it will shift production at its Triunfo, Brazil, plant from emulsion styrene butadiene rubber (E-SBR) used in conventional tyres to solution styrene butadiene rubber (S-SBR) used in high-performance green tyres. It’s a trend playing out all over the world as more countries institute new tyre standards.

But the question in North America is: What does the switch to S-SBR mean for US butadiene (BD) producers? The short answer seems to be, “No one knows”.

“Solution SBR has been around for a long time,” said James L McGraw, managing director of the International Institute for Synthetic Rubber Producers (IISRP). “Historically, it has been used in very high performance tyres.”

But that is starting to change as European countries, Japan and even China institute new green labelling standards. Going forward, industry sources said, more tyres will be made from S-SBR.

“Tyres made from S-SBR offer improved performance, safety and fuel efficiency,” McGraw said.

New standards also mandate that tyres offer less rolling resistance – the amount of energy needed for the tyre to overcome the resistance of the road – and therefore cars riding on these tyres tend to be more fuel efficient.

In one way, the move to S-SBR tyres is good news for the US BD industry because manufacturing them requires more BD. According to industry sources, the composition of E-SBR is about 60% BD, while S-SBR is about 70% BD, although those percentages can vary. For example, ICIS price assessment methodology goes with 76.5% BD for E-SBR.

Market share for replacement tyres in the US has shifted sharply in favour of Asian producers over the past few years because of relaxed tariffs. According to data from Global Trade Information Services, tyre shipments from China into the US totalled 3.56m units in October 2012, more than double the 1.74m units in the previous year. As a result, imported tyres – mostly from Asia – now account for about 50% of the US replacement tyre market.

In the near term, demand for US BD is actually expected to go down slightly because US tyre producers have lost so much of the low-end replacement-tyre market to Asian imports. But the US is also working on its own green-tyre standards that are expected to become law within about two years, industry sources said. Once that happens, demand will shift to the higher-priced, higher-BD-content S-SBR tyres, and US BD producers should see an uptick in demand.

“We’ve been looking at this,” said one BD market participant, “and we’ve divided the issue into two timeframes. In the near term, we think we’ll see demand for US BD fall. Longer term, the question will be, ‘What’s the Asian tyre penetration rate going to be into the US tyre market once the new tyre standards go into effect?’ No one knows.”

“My thesis is that there’s been a tonne of new capacity added in Asia,” said another market source. “I think it’s just a matter of time before [Asian BD producers] start pushing into the US market. That’s not going to be good for non-integrated producers, because once the US market gets a taste of Asian BD, they’ll find it’s addictive.”

Some market sources think it’s too early to forecast what US BD demand will look like in a few years.

“There are a lot of ‘ifs’ in all of the scenarios that look at BD demand in North America,” said one source. “Yes, cheap [Asian] tyres currently have about 50% of the US replacement-tyre market. But as the US implements increasingly stringent tyre regulations, I’m not sure Asian producers will be able to meet these regulations. To do that, they’ll have to start making better tyres.”

“This is nothing new,” said another market source. “We’ve seen the same thing happen in Europe. Cheap tyres came into the market, but once the new green regs were passed, the Asian producers lost market share. The same thing has happened in Japan and Brazil, too.”

One market source said that US BD producers have nothing to worry about. Not only will US tyre makers gain back share in the replacement-tyre market, but China also will be thirsting for US-made BD in a few years. That’s because China is adding new butadiene rubber (BR) plants, but doesn’t currently have the BD feedstock supply to support them.

“China has a BD supply problem,” one source said. “They are currently operating their BR plants at about 50% of capacity and using up all of the BD they produce locally. What are they going to do when they want to crank these plants up to 60% or 70% of capacity? They can’t unless they bring in BD from elsewhere, most likely the US.”

Indeed, several market sources said the US will continue to enjoy a significant price advantage in producing BD for years to come due to the shift to lighter feedstocks. Currently, about 95% of Chinese BD is made from heavy naphtha feedstocks, sources said. As the US moves to making BD from lighter, less-expensive feedstocks, US product will be in greater demand, they said.

But there’s just one problem with the scenario in which China lusts after US-made BD. China is adding BD capacity and knows that Asia is expected to be the fastest-growing market for tyres over the next decade, led by middle-class growth in China and Korea. Tyre producers from the US and Europe are already moving production there, to be close to the world’s fastest-growing market and to take advantage of Asia’s cheap labour costs.

In January, Michelin began rolling tires out of its new $1.50bn (€1.14bn) factory in Shenyang, China. Later this year, the French tyre maker expects an Indian plant to come on board in Chennai. In 2012, Michelin had 107,300 full-time-equivalent workers globally, versus 105,100 in 2010. Due in part to expansion abroad and contraction at home, Michelin’s employee-benefit costs for 2012 fell to 25% of sales from 27% in 2010.

“Asia is the future,” said one market source. “The tyre makers are moving there and, eventually, the BD producers are going to have to move there as well. They’re gonna want to be next to the fastest-growing market in the world.”

($1 = €0.76)