The world's synthetic rubber industry has slipped into production overcapacity fairly often during its 70-some year history. This time, the reasons behind the phenomenon, and its future ramifications, are different.
The recurring cycle in the past was this, according to industry participants and analysts: Synthetic rubber producers would build capacity to feed a growing need for the material, particularly from tire and automotive customers. Then demand slipped, and all the negative aspects for that end of the cycle for SR makers would take place—falling rubber prices, production cutbacks, layoffs, plant closings.
When things got bad enough, the number of players was winnowed out, too.
Today on paper it looks the same: weak prices, not enough demand, lots of unused capacity with even more SR lines and facilities on the way. It's a scenario that James McGraw, managing director and CEO of the International Institute of Synthetic Rubber Producers, warned organization members—most of the world's SR makers—was coming.
“Probably one of the biggest challenges we're looking at is overcapacity,” McGraw said in a recent interview. “In a number of speeches I have been giving around the world, I've said that we are building toward a time when we're going to have excess capacity, and it's primarily coming out of Asia.”
During McGraw's 40 years in the SR industry, he has seen the cycle in play. “We've gone through cycles when there is overcapacity, and then rationalization, and then we start to build capacity again.”
The first oddity in the latest overcapacity situation is the rebound from the last worldwide recession—or lack of one.
“Recovery from recession has been much slower than we would have expected,” said Bill Hyde, senior director of olefins and elastomers at global chemical consulting firm IHS Inc. “So demand growth has not come back as quickly.”
Building an SR plant or boosting production at an existing facility takes time. The analyst—who tracks butadiene-containing rubbers such as solution and emulsion SBR, polybutadiene and to some extent, butyl—said SR producers have been adding capacity to meet the expected demand of five years down the road.
Demand today isn't where they anticipated it would be, he said. The results of the slow consumption levels are what can be expected: weak prices and poor plant utilization rates. “Operating rates for SSBR I'd definitely have to put below 50 percent nameplate capacity globally, probably approaching the low 40s,” he said, with some companies doing better than others.
Weak demand means weak prices. “I don't think SBR has found the bottom yet,” in the U.S., said an industry source who asked not to be named. He said look to butadiene prices to get an indication of how things are in the butadiene-based rubber business.
“Butadiene prices have been falling. If butadiene prices are dropping, that's not a good sign for the SBR industry, and it tells you something about demand, because butadiene goes into SBR and polybutadiene,” he said. “Butadiene prices are down not because they added a bunch of BD capacity, but because demand is down. I would say SBR margins are under pressure right now.”
Another unique factor that has helped create SR overcapacity is natural rubber. The world is awash with Hevea rubber, and that has had a negative influence on the price of SR, which competes with NR.
“Synthetic rubber margins are weak and SR producers can't raise prices because if they do, that demand just goes into the natural rubber space,” Hyde said.
And then there is the gorilla in the room whenever discussing the SR industry—China.
The China factor
“Right now overcapacity seems like it is much worse because there is a tremendous amount of capacity that has been built in China,” the IISRP's McGraw said. “It is amazing what has happened over there in such a short amount of time.”
China is the world's largest producer of synthetic rubber, according to McGraw's colleague, Roxanna B. Petrovic, head of the statistical program at the IISRP. In a report she gave to the group's members earlier this year, Petrovic said China accounts for 28 percent of the world's SR capacity, compared with North America—for many years the world leader—at 17 percent.
Another rubber industry executive said expansion has slowed in China, and the word is the government wants to pull back on investments in SR production. However, “China is notorious for building any form of capacity, including empty cities, for future consideration,” he said. “The Chinese have a lot of people to put to work, and I don't think they have bet big on the service industry.”
IHS's Hyde said China, like a number of other nations, didn't really care if the global SR industry was well supplied when it planned its many expansions.
“China has been a very large net importer of synthetic rubber, so the Chinese companies look at that and say "we'll produce here and cut imports,' “ Hyde said. That means companies in other nations that worked to fill China's immense appetite for rubber lose their big customer, for which they themselves expanded capacity.
As an example, Hyde said South Korea SR producers have been big exporters to China. “They now are forced to either run at lower operating rates or sell into other markets. Both are happening.”
Economic growth in China has slowed, too. Hyde points to the automotive sector as a factor in that situation.
China put a number of incentives in place to encourage car sales, the analyst said. “What happened was the car sales overwhelmed the infrastructure in a lot of the larger cities,” he said, which led to air quality issues and traffic congestion. “The population density in those cities is so high they have to limit the number of cars they will let on their streets, or they'll just have a big, giant parking lot.”
The result is the automotive market, while still growing, is not increasing as rapidly as in the past.
“Our view is that the Chinese economy still is going to be a little soft next year from a GDP perspective of below 7.5 percent,” Hyde said, compared with the 10-plus percent growth it had been enjoying. “But it should be relatively strong, in comparison to the rest of the world. China still has the highest growth rates.”
Capacity operating rates in China's SR industry are low, too, said Hyde. That's true, one of th-e other industry sources said, but hasn't halted approved expansions there. He recited a long list of new capacity or modernization projects being pursued throughout much of the world, many started four years or so ago and now about to go online.
Europe is adding a lot of capacity, he said, including in Scotland, Italy, Poland and Hungary.
The Asia-Pacific region, excluding China, also has been adding or planning major expansions. The IISRP's Petrovic reported those countries account for 26 percent of worldwide SR capacity.
India is a big player in the capacity game, recently commissioning two production lines and trying to get another four up and running, one executive said. South Korea and Indonesia are contemplating expansions, and “Malaysia is waiting in the wings.”
The industry executive said Russia, which is involved in a butyl project in India, is aiming more toward modernizing its plants, rather than building new facilities.
In all, according to Petrovic, there are at least 16 projects to increase polybutadiene capacity, 18 for SSBR, nine for butyl and 10 for EPDM.
EPDM is an interesting case because of an expected better-than-average increase in demand, compared to other rubbers. A study by research firm MarketsandMarkets, published in August, estimates the global EPDM market will grow at an average annual rate of 6.5 percent through 2019, to a value of $7.46 billion. The material is used in building and construction, wire and cable, and a wide variety of other applications, with its biggest market being automotive.
Much of that optimistic forecast is because consumption is expected to be very strong in the China automotive sector.
One source, involved in the U.S. rubber industry, said the EPDM market hasn't been especially robust in that country. “A couple of years ago it was sort of tight, and they were getting margins close to a dollar, before fixed costs. Today it is probably half that.”
He said the worldwide SR expansion bug never hit the U.S.
The other source who asked not to be named agreed, and said many of the projects are launched under licenses from the major existing SR producers. He said SR production follows tire manufacturers that have been moving production overseas. Other nations are imitating the China model and becoming domestic producers rather than SR importers.
“There seems to be more of a relocation of capacity near tire and car manufacturing centers, with the expectation of closing older, less-efficient, isolated plants once the new capacity comes on line. How else can you explain all the licensing by the "Big Boys' when they already have plenty of installed capacity,” he said.
Two other factors play into the current SR overcapacity scenario. Both involve U.S. government action, and the first, again, is centered on China.
Several sources said the possibility that the U.S. again will slap high tariffs on Chinese-made tires—a repeat of what happened for three years starting in 2009—would affect SR production.
“That could have an impact, although from a synthetic rubber standpoint probably wouldn't have an impact globally because the tires are going to be made someplace,” Hyde said. “But it could have an impact on China.”
One of the other sources asked, “Where is all that SBR going to go if they aren't making those tires in China? That's a lot of capacity looking for a home.”
The other government action, or inaction, is tire labeling.
Hyde said there were some fairly optimistic growth rate forecasts for solution SBR because of tire labeling, “which was going to cause a massive shift away from emulsion SBR to solution SBR. Well, it hasn't happened. It's beginning to, but not to a huge extent.”
Instead, SSBR capacity that went online, especially in 2013, wasn't needed yet. “That really knocked operating rates down,” Hyde said.
The overcapacity situation in the global SR business won't last forever, sources agree. It just will take time before the new capacity is absorbed.
One of the sources expects the expansion trend to slow next year, when most of the new capacity is ready to go. McGraw said when the IISRP was working on its annual statistical data book on the industry, it found some of the expansion projects announced one or two years ago have been put on hold. “That's good news for existing producers,” he said.
Hyde, talking about SSBR, sees another two to three years before capacity and demand equalize.
“I do think it will pick up,” he said, and expressed optimism for the material's prospects in the long run. However, “until tire labeling becomes a fact in the market, you're not going to see the full SSBR demand growth that we expect.”
Meanwhile, the rubber SSBR has been replacing in tires, emulsion SBR, isn't dead, he and other sources said.
“ESBR became the unsexy SBR, so there haven't been that many new units built over the last few years,” he said. While some predicted the imminent demise of the rubber, Hyde said he doesn't buy into that.
“There continues to be a market for ESBR. It's not even growing as fast as GDP, but it is still positive growth. There are a lot of applications where you don't need the higher performance you get from SSBR, so you're not willing to pay the higher price.”