NR market’s ‘structural imbalance’ could weigh on SBR

By Mark Yost

BERLIN (ICIS)–China has 500,000 tonnes of surplus natural rubber (NR), or about 5% of annual world production, sitting in warehouses, up from 200,000 tonnes of backlog a year ago, a consultant said on Wednesday.

In 2012, the natural rubber industry had a 400,000-tonne surplus: 200,000 tonnes in warehouses in Thailand and 200,000 tonnes in warehouses in China, said Robert Simmons, head of rubber and tyre research at LMC International, who was speaking at the second annual ICIS Butadiene & Derivatives Conference.

Today, China has a half-million-tonne surplus of NR and plans to surplus another 200,000 tonnes this year.

“Chinese tyre manufacturers are holding inventory,” Simmons said. “They’re supporting stockpiles until tyre prices come up.”

Viewed more broadly, Simmons said the natural rubber market is “entering a period of structural imbalance. Something has to give; probably less tapping”, meaning production at rubber plantations.

Simmons went on to explain that the natural rubber market is in the middle of an age-old conundrum. Higher prices typically lead to more planting, but there is a lag of 6-7 years between planting new trees and tapping new product. So producers who planted trees in 2007 amid rising prices now find themselves trying to sell more material into a market that has seen demand drop sharply.

In his presentation to the conference, Simmons noted that rubber production has risen by about 4% a year since 2007. Natural rubber prices peaked in 2011 at about $6,000/tonne, Simmons said, a 15-fold increase from prices of $400/tonne just a decade ago. On the Malaysian Rubber Exchange, SMR 20 NR prices were at $2,484/tonne FOB (free on board) Malaysia on 9 September, up from $2,420/tonne FOB Malaysia on 29 August.

Natural rubber producers are further vexed, Simmons said, by the fact that as natural rubber prices rose, tyre makers, which use about 75% of global NR production, began substituting less-expensive synthetic rubber such as styrene-butadiene-rubber (SBR).

“In 2011, natural rubber was higher, so tyre makers were switching to synthetics,” Simmons said. “Now I think you’re going to see the industry substituting natural rubber for synthetics.”

That is potentially bad news for SBR producers, who have seen prices drop sharply over the past few months due to significantly reduced worldwide demand for replacement tyres. In July, Goodyear reported earnings for the first six months of 2013 and said it had produced 1.6m fewer tyres than in the same period a year ago.

The monthly contract price for US SBR 1502 has fallen from 117 cents/lb ($2,579/tonne, €1,934/tonne) a year ago to 85.5 cents/lb in September.

As for natural rubber, Simmons said that China is further undercutting the value of its current surplus of NR stock by encouraging more rubber planting in neighbouring countries as part of a poppy eradication program. 

China’s dominance of the natural rubber market is part of a shift of tyre production from the US and Europe to Asia, Simmons said. That is because demand for replacement tyres is flat to declining in the US and EU markets, while it is growing in Asia and other developing markets.

Last year, China imported about 4m tonnes of natural rubber out of a total global market of about 10m tonnes, Simmons said. Some of that rubber is going into tyres that will be sold in the domestic market, but some of it is for export, he said.

He also noted that China is adding 250,000 tonnes of synthetic rubber manufacturing capacity.

Simmons estimates that despite sharp downturns in replacement tyre sales in the US and the EU, the sector is growing by 3-5% a year. Natural rubber, he said, is growing at about the same rate and continues to be dominated by Thailand, Indonesia and Malaysia, which account for about 65% of natural rubber production. Vietnam, China and India make up about 25% of the market, with Laos, Cambodia, Myanmar and some parts of West Africa emerging as small producers.

Despite the abundance of natural rubber, Thailand exported more than 1m tonnes over the past 24 months, Simmons said, and that does not include the 200,000 tonnes sitting in warehouses in Thailand.

“One of the dangers the market faces is it’s in a period of surplus, a period of low prices and very little new plantings,” he said. “So you can end up in a position with no new plantings, no new production. Natural rubber producers will likely go from a period of glut to a period of deficit. But in the long term, the market will balance itself out.”

($1 = €0.75)