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 Recession brings rubber prices down, but buyers stay on the sidelines

Natural rubber prices rebound but synthetic rubber prices continue to erode

By Gordon Graff -- Purchasing.com

The huge slump in the automotive and tire markets has cooled off demand for natural and synthetic rubber, causing prices for both to tumble dramatically since last year. While natural rubber prices have rebounded a bit since the start of the year, synthetic rubber prices have continued to erode.

But prices for both types of rubber should be on the upswing over the next few months, according to industry sources even though rubber buyers are not rushing to stock up at the current low prices, either because they lack the cash or they are uncertain about future demand.

After hitting an all-time high of $1.47/lb last June, average world natural rubber prices plunged to 57¢/lb last December, according to the International Monetary Fund. They gradually rose again to 74¢/lb in April. Meanwhile, synthetic rubber prices, which includes a variety of different materials, closely tracked butadiene, a key synthetic rubber monomer. Butadiene prices plummeted from $1.12/lb last November to 65¢/lb in December, reports Purchasingdata.com. That trend has continued, with butadiene tags sinking to 36¢/lb by April. One synthetic rubber, polybutadiene, has paralleled this movement, with prices sinking from $1.50/lb at the start of the year to $1.10/lb by early May.

Demand for rubber in the all-important automotive sector witnessed "an incredibly sharp decline" in the fourth quarter of 2008, says Whitney Luckett, vice president for sales and marketing at RCMA Americas, a Norfolk, Va. importer of natural rubber. "Essentially, people just stopped buying," she recalls. Since then, with their reserves dwindling, some rubber consumers have cautiously resumed their purchases, Luckett says, which has spurred slightly higher prices. But tiremakers as a whole continue to struggle, with such majors as Goodyear, Cooper and Bridgestone posting losses in recent months.

Demand for synthetic rubber also began to shrivel last year, but prices didn't reflect that until late in the fall. Part of the reason was that butadiene monomer was tight for much of 2008. But now, butadiene is "very, very long," says Bill Hyde, an olefins and elastomers analyst with Chemical Market Associates Inc. (CMAI). Much cheaper crude oil this year has also taken the steam out of butadiene prices, he adds.

As with natural rubber, demand for synthetic rubber "has been decimated by the slowdown in the auto industry," says Hyde. The impact stems not only from less car manufacturing but fewer purchases of replacement tires. "Drivers are stretching the life of their tires as long as they can before they go in to replace them," Hyde notes.

The up-side of such feeble demand is bargain pricing for rubber. But this is not prompting a wave of buying across the board. Tire companies in North America bought large amounts of rubber at last year's record high prices, notes Luckett. But with the collapse of demand, "they simply don't have enough cash" to begin stockpiling rubber in anticipation of better times ahead, even with today's attractive prices.

Uncertainties about the future are also curbing buying. A case in point is Callaway Golf Co., a Carlsbad, Calif.-based manufacturer of golf equipment, where purchasing manager Marc Winkfield is putting the brakes on rubber stockpiling. He says he had to pay premium prices last year for the polybutadiene rubber his firm uses in golf balls, but is now paying far less.

"Unfortunately, demand is very soft right now," Winkfield says. On the manufacturing side, he adds, "our practice has been to have lean inventories." So he is reluctant to stock up on rubber, even at today's low prices, or to engage in hedging strategies, because he can't accurately predict when demand will pick up. Rubber buyers in general seem to be holding back for the same reason, Winkfield notes.

At Hecht Rubber Corp., a Jacksonville, Fla. fabricator of a wide variety of rubber goods, Larry Hecht, the firm's president, says he tries to stock up on rubber when prices fall to low levels. But in contrast to most buyers' experiences over the past year, he says that "the prices we pay for rubber have hardly come down at all." What has dropped considerably, Hecht reports, is the fuel surcharge for freight that his rubber suppliers imposed last year.

With natural and synthetic rubber subject to wide price swings, one form is likely to be cheaper at any given time and place than the other. Such price differentials between the natural and synthetic materials have caused many buyers to substitute one for the other in their products as their relative prices change. While the typical ratio of synthetic to natural rubber in a passenger car tire is about 60:40, this can be changed for economic reasons. Goodyear Tire & Rubber, for instance, does this routinely, and says that as much as 20% of the natural rubber in its tires can be substituted for synthetic rubber, or vice versa, without impacting tire performance.

But when considering rubber substitutions, buyers should weigh not just price alone but "the total cost of using one raw material vs. the other," says Goodyear spokesman Keith Price. As a raw material for tire manufacturing, he notes, synthetic rubber requires less preliminary treatment than natural rubber because it is "an extremely clean material without foreign contamination." Buyers should also consider how replacement rubber grades will behave in selected applications, Price continues. Tires for aircraft and off-the-road vehicles require natural rubber to handle the heat they generate, he says, while tires for passenger cars and light trucks can use more synthetic rubber.

While the differential between natural and synthetic rubber may shift in the remainder of this year, both materials are likely to witness price hikes in that period. As Luckett sees it, natural rubber prices at the start of the year were "way too cheap" to be sustainable, even with slack demand. She anticipates that prices this year will gradually migrate upward toward a "stabilization point," where supply and demand are in balance. That point is in the 80¢/lb to 91¢/lb range, she estimates. One source of this upward price pressure, Luckett points out, may be stockpiling by China, which still has a fairly robust auto industry.

As for the synthetic market, "increasing prices for butadiene are probably just a matter of months away," says Hyde. One cause of this, he adds, is a "pent up demand" for replacement tires. (Butadiene is a monomer for the styrene-butadiene rubber used in auto tires.) Many drivers have waited far longer than normal to buy replacement tires, he explains, and will soon be forced to make such purchases. But with inventories of synthetic rubber and tires fairly low, this sudden surge in tire demand will "reverberate up the supply chain," making butadiene monomer tight and "substantially" more costly. As a result, synthetic rubber will reflect those higher monomer costs. Hyde says he's unsure exactly when this higher price scenario will unfold, but he estimates that it will occur before the end of this year.