For rubber companies, future must wait in line

There are a handful of macro issues that will dominate the rubber industry over the next decade and longer.

It's well-known that automotive is evolving at lightning speed. And the issue of sustainability and the industry's impact on the environment also get prominent attention from firms up and down the supply chain.

But the problem is that, while working toward the future, rubber-related companies first have to deal with a myriad of issues that are impacting their businesses and bottom line right now. Working through the downturn caused by the COVID-19 pandemic, players in the rubber and tire sectors—along with most every other industry—have had to deal with supply chain hurdles, material shortages and price spikes, among other things.

This has brought on a situation where many rubber-related firms are seeing business rebound nicely in many end markets, but are now in the uncomfortable position of making customers wait on orders, if they can fulfill them at all. And many say that while they are able to fill the needs of current customers, they have had to turn down requests from others seeking a new source of materials or goods.

Just ask Bonnie Stuck, president of Akron Rubber Development Laboratory Inc.

She spent most of a recent week searching for a replacement for an antioxidant that's used in high heat and high flex fatigue applications, and there's no chemical substitute for it. Stuck said shortage of raw materials has been an ongoing issue for some time, and she doesn't see it ending anytime soon.

"Now that we're globally sourced, the transportation issue becomes a part of it," she said. "And we have a natural rubber issue, and a lot of that is we've gone many years without thought of the supply chain. World War II and the rubber situation was critical, but it's becoming more so now because in natural rubber you have to invest in the actual plants so the people can make a living wage."

If that doesn't happen, then more nations will react like Malaysia and shift planting away from rubber to crops like palm oil, which is much less labor intensive.

Ernie Pouttu, president and CEO of Harwick Standard Distribution Corp., said the shortages were caused by a number of factors that happened in succession. Besides the pandemic, there was the freeze in Texas, impact from a hurricane and the major issues at shipping ports.

"It seems like every day something different comes up," Pouttu said.

He doesn't want to seem too gloom and doom, and he's glad that business has bounced back. "It's always challenging," Pouttu said. "It's just what are the challenges and how do we face them?"

The Harwick Standard exec expects to see some normalization by the start of 2022.

"Am I optimistic? Of course I am," he said. "We've been through tough times before and we've always come out of them. The business levels are good. There is a demand out there.

"We just need to get the supply chain fixed. Overall it shouldn't be that hard of a fix. Various customers have orders on the books and I believe we will be able to get products to fill those orders."

Others are seeing similar issues, but aren't sure the light at the end of the tunnel will come that quickly.

Rick Valeriote, a director with Poly-Nova Technologies L.P. in Guelph, Ontario, likens the current situation to the last time a pandemic (the Spanish flu) such as this occurred, which led to the Roaring '20s back a century ago. He said things will get worse before they get better in terms of demand going higher, and suppliers will have a difficult time meeting demand.

"If I was still in that CEO role, this would be keeping me up at night," Valeriote said. "Where the heck are we going to get material? And second, even as automated as we are, there are still a significant number of human beings in that building. Without them, as sophisticated as we think that equipment is, we are not yet at the point of artificial intelligence that those machines are running themselves."

Looking ahead, he sees continued problems with silicone rubber supply, because the demand for chemical grade silicon metal has gone through the roof because of its applications in other uses besides silicone elastomers.

"You have a whole bunch of people competing for the basic starting material for silicone. Add to it the lack of polymerization capacity, caused by the price of silicone being too low for too long," he said. "You end up waking up one day in the middle of a significant supply crisis, which is where we are right now."

Many of the problems are tied to logistics and freight, or getting materials and goods from one place to another, according to Anthony Mariniello, ChemSpec technical sales manager.

Mariniello, who is treasurer of the ACS Rubber Division and will be chair in 2023, said demand is strong, and the rebound has been stronger than 2020 and 2019.

"The industry seems to be in a growth-driven area, at least for what we're seeing in terms of product moving," he said. "Folks seem to be growing. Folks seem to be manufacturing."

The concern he sees is with the price increases. What will the impact be on end users?

"All we do everyday is adjust prices. I don't think there's one day that something's not being impacted," Mariniello said.

Forecasts on when this will end range from three to six months, with others expecting a time frame more around 18 months. "If our economy continues to grow and we drive unemployment down, and have right interest rates and funding in place, we can continue," Mariniello said. "But if an inflationary event occurs and we begin to have a pullback, then that would impact the amount of material that is going to be demanded. I could see that causing a ramp-down."

Chris Bitsakakis, AirBoss of America Corp. president and chief operating officer, said the rubber industry finds itself in the middle of a "force majeure typhoon."

"As the economies start to recover post-pandemic, there is a lot of pent-up demand that I think will drive a type of crisis in terms of raw material pricing and availability," he said. "I think there's going to be a period of time which will last more than months—thinking more of a year or two—where raw material demands and shipping challenges will persist as the economy evolves."

Following that, he looks for some normalization over the next decade. "Ten years from now, I think we're going to see the rubber industry stabilized, doing very well, growing at a market rate that is acceptable and doable and does not provide extra stress on the system," he said.

On the horizon

When the rubber industry does get a chance to move beyond current market problems, there are plenty of issues firms must be ready to navigate. Chief among these include the evolution of the mobility system and sustainability. As well, reshoring initiatives remain tenuous as the world continues to work its way through the coronavirus pandemic.

While the march toward electric vehicles continues to dominate headlines, there are some who question the timeline as to when EVs will move to the front of the line, and remind people that internal combustion engines will be around for years to come.

Joe Walker, global technology director of materials and laboratories for Freudenberg Sealing Technologies, said by the late 2020s, perhaps 30 percent of automobiles will be some sort of hybrid or all-battery systems. But that still leaves a large market for ICE powertrains, putting traditional automotive component suppliers in a difficult position.

"The question becomes, how do you adjust your production for that because this industry is very capital intensive," Walker said. "In many cases, the capital is dedicated to run a particular process or material."

The auto suppliers then must determine how to adjust their work forces. Do they consolidate or close down facilities, or re-tool to use another type of material other than rubber?

"How do you balance that?" he asked. "I'm not sure if anybody has the magic answer to that. It represents some grandiose opportunities, and it may be one of those where only the strongest survive."

As an engineer, Valeriote said he understands climate change and agrees that EVs are the wave of the future. But other questions, such as a clear understanding of the relationship between the energy density between gasoline and batteries for EVs, remain.

"What nobody seems to want to talk about is the fact if you were to calculate how much electrical power would be required, we would have a deficit of generated power that is stunning. And the grid couldn't handle it," he said.

Sustainability and the environment

Walker said the future also will see rubber and tire companies focusing more time and resources making sure their products and materials are processed in a sustainable manner, so as to lessen their impact on the environment.

He noted that recovered carbon black already has an ASTM International committee focused on activities in the relatively new area.

"I'm convinced that there is going to be an increased amount of activity for more recovered polymer," he said. "I think we will see a more sophisticated approach on how to use some of these building blocks that heretofore were just disposed of."

Walker also is optimistic that work on alternative forms of natural rubber will meet its goal of becoming a supplier of commercial quantities of NR, citing research in a number of areas, including guayule, the Russian dandelion and others. One major goal to hit is what he called a "magic number" of producing enough rubber to build 500 tires per acre.

"I think the agricultural prowess of the United States will be heavily relied upon to become (as Katrina Cornish of Ohio State University predicted), a net rubber exporter, not just the largest consumer," Walker said.

ARDL's Stuck added that because there's a finite amount of rare earth metals and others such as titanium and lithium, that in 10 years she wouldn't be surprised to see active mining of waste landfills for metals and other materials in short supply.

Will reshoring take hold?

Valeriote said if there was one lesson to be learned from the pandemic, it should be to recognize the need to have manufacturing capabilities for key components.

"These problems with supply today are because there wasn't a large enough return on capital to allow these facilities to be built in the NAFTA countries," he said.

Bitsakakis of AirBoss agrees.

"Because of the pandemic, the U.S. doesn't want to be caught with its pants down again, particularly with personal protective equipment production," he said.

He used nitrile gloves as an example, which mainly are sourced from Southeast Asia. The Biden administration has given incentives for firms to install capacity in North America to build the gloves.

"The issue then is you have to ship all the polymers and chemicals from Asia to here, which starts to defeat the purpose in terms of some sort of security around being able to produce it safely," he said. "I think you will see chemical producers of nitrile, NBR and other chemicals look to set up shop in North America."

With all the new projects announced for nitrile glove production, however, he thinks there will be winners and losers. "I think the ones who have experience in this space are going to do quite well," he said. "And the ones who don't could be caught with invested production lines that they have trouble making a good product day in and day out, because they don't have that experience in this kind of production process."

He added that it can't just be about price. If domestic supply is truly desired, customers have to be prepared to pay more for it. The problem is that, while the U.S. government can put in specs demanding local production, what about potential customers such as private hospitals?

"Are they going to be willing to pay a premium for locally produced when they're on a budget and there are pressures on profitability?" Bitsakakis asked. "That might be a little trickier."

Cooperation needed

Some of the collaboration that once was a hallmark of the rubber business has slowed over the past two decades, according to Stuck. When she started with B.F. Goodrich in 1977, the firm worked together with a number of different suppliers. But now she said many major firms aren't sharing information with their customers, a situation she doesn't support.

"I think to keep moving forward to meet the demands of electrical cars, we're going to have to come up with new inventions and new chemicals," Stuck said. "I think to do that you're going to have to partner with customers. ... If you're doing a startup chemical, you can't afford to go out there and invest in it unless you know you're going to have somebody buying it."

Mariniello said collaborations are needed to boost growth.

"I always see people are driven to create an added benefit, and they like the idea that sometimes you can get 1 plus 1 to equal 3," he said. "And that's what drives these partnerships. They believe you can create the synergies necessary to bring you to the next level, and not just combine your sales and your gross profit. But instead you can create something new that is going to drive growth."

Dressed for success

Pouttu said financial stability, service and customer support will remain tenets of a successful company. For a company like Harwick Standard, it also helps to be able to supply a wide breadth of products.

"You don't go to five stores to buy groceries," Pouttu said. "Your truck comes to Harwick because you can get three, four, five different products all at the same time."

Bitsakakis said it starts by having a strong supply chain management system.

"They're going to need to have redundancies across a variety of chemicals and additives," he said. "They're going to need to have strong relationships with their supply chain providers because I do believe the supply chain issues going forward will be the greatest challenge for any rubber company."

As for his company, Bitsakakis said AirBoss is banking on a strategy where its custom compounding business focuses on quality and service, concentrating on the specialty end of the mixing business. It also has high hopes for its defense side, where there is much crossover into health care for its PPE products. In the coming months, AirBoss will unveil a new protective mask designed for first responders, paramedics and hospital employees that he said is far superior to N95 masks and easier to wear in their environment.

Walker said success starts with strong cash flow and the ability to invest in internal research capabilities, because competition will only get stronger.

"They will have to have a strong culture of lean manufacturing," Walker said. "It's still a global world, and you're still going to compete with some very worthy opponents who are not necessarily domestic, and you're going to have to figure out how to make it as cost-effective as somebody else can."