WASHINGTON-With natural rubber prices reaching 20-year highs and some synthetic rubber prices also increasing, how much can rubber product manufacturers do to alleviate the impact on their operations?
The answer: not much.
"In 26 years, this is the worst year I´ve seen for raw materials costs," said Walter J. Morris, CEO of latex medical product manufacturer Morris Latex Products Inc. in Noble, Okla. "Demand is sky high, and the Pacific Rim is totally influencing supply and demand. It´s going to get worse before it gets better."
Morris Latex Products has told its customers they can expect price increases July 1, Morris said, although he acknowledged the need to hold off price hikes in the fiercely competitive rubber product market as long as possible.
In the past, tire and rubber product manufacturers have changed formulations to increase the use of SR when NR prices were high and vice versa. Gates Corp. said NR prices have just about doubled in the last 15 months, whereas styrene-butadiene rubber prices decreased slightly because of overcapacity.
Nevertheless, tire companies have limited ability to switch between NR and SR, and engineered rubber product makers such as Gates have even less.
"Tire producers can switch 5 to 7 percent in a formulation to offset some of the cost increases," Gates said. "But in our business, the volumes are low, so the savings of minor changes do not offset the product performance risk to our customers."
One tire maker that boasts of its ability to replace NR with SR is Goodyear. In April of this year, the Akron-based industry giant announced that new proprietary polymers and rubber compounds allowed it to replace more than 15 percent of the natural rubber in a tire without hurting performance.
Goodyear began this effort in 2004, when natural rubber prices first showed signs of escalating, the company said. But Goodyear is something of a special case, and even so, its abilities to switch formulations aren´t limitless.
"We won´t flip back and forth on a daily basis," a Goodyear spokesman said. "And you must remember we make the synthetic rubber we use."
The price and supply situation
On May 8, the price of Standard Indonesian Rubber 20-the grade of natural rubber most often used by U.S. tire makers-closed at more than $2 per kilogram F.O.B. (at the port of origin) for the first time ever.
As of May 15, SIR20 stood at $2.16 per kilo F.O.B.-about 98 cents per pound-compared with 81 cents per pound Oct. 7 ex-dock (at the port of delivery) and 64 cents per pound ex-dock June 10.
Meanwhile, Rubber Smoked Sheets 3 climbed to more than $2.40 per kilo, according to a source who asked to remain anonymous. This price differential between SIR20 and RSS3 is almost unprecedented, the source said, and the extensive network of middlemen in the distribution and sale of rubber smoked sheets, especially in Thailand, are probably the cause.
While tight NR supplies and increasing demand from China play their part in the pricing situation, the source blamed increased speculation on rubber futures as the main culprit.
"People who normally wouldn´t be entering the natural rubber market are now doing so in a big way," the source said. "Fund managers for British Telecom have decided commodities are where they want to be."
Along with this boom in speculation is a growing concern that high costs of petroleum and other raw materials are putting the brakes on SR production, according to the source.
"The switch to SR has already happened, but now they´re saying that SR prices are climbing, too," the source said.
In 2005, the world consumed 8.75 million metric tons of NR and 11.94 million tons of SR, according to the International Rubber Study Group. This compares with NR production of 8.63 million tons and SR production of 12.01 million tons for the year, making for a 120,000-ton shortfall in NR and a 70,000-ton surplus in SR, according to the IRSG.
Based on the two or three months of data it has so far for 2006, the IRSG is projecting a smaller NR deficit for 2006, of 25,000 to 50,000 tons. If an SR surplus continues in 2006, it is likely to be smaller than in 2005, the group said.
While some regions of the world may well have surpluses for most elastomers, China-the world´s largest SR market-is likely to continue its current deficit, according to the IRSG. Because of that deficit, all new SR projects seem to concentrate in and on China, it said.
As for the global situation for various types of SR, the IRSG is waiting on forecasts from the International Institute of Synthetic Rubber Producers before it comments further, it said.
Additional SBR capacity coming online in Asia will keep SBR prices soft for the foreseeable future, according to Gates. On the other hand, the closure of the Polimeri Europa S.p.A. neoprene plant in France last year, plus DuPont Performance Elastomers L.L.C.´s reduction of neoprene capacity in the U.S., have kept U.S. neoprene supplies short and prices high, Gates said.
"The (neoprene) demand forecast continues to show negative growth, and higher prices and limited supplies will surely accelerate the move to alternate materials," the company said.
The NR supply, meanwhile, is not likely to show substantive increases any time soon, according to the anonymous source.
"One thing you´ve got to realize is that it takes seven years for a rubber tree to mature and produce," the source said. "Anything planted this year is not likely to produce any rubber until 2013."
Doing the best they can
All of the companies contacted said they are coping with the NR and raw materials situation as best they can, but said they have little leeway.
"With natural rubber, it´s almost impossible to alleviate the situation," said George Caplea, president of Trelleborg Automotive in South Haven, Mich. "It comes at a much, much higher price. Coupled with higher aluminum, steel and natural gas prices, it´s a very trying time."
Occasionally, some substitutions are possible between NR and SR, Caplea said, although EPDM prices have been going up. But mainly the only strategy any rubber product manufacturer has, he said, is to raise prices.
"We´ve had some discussions with our customers, and we will continue to have them because this situation is not going to go away," he said.
Maine Industrial Tires Ltd., based in Gorham, Maine, has no leeway at all for switching: all of its products are 100-percent natural rubber, according to MITL President Ken Hebert.
The company is working with its customers, passing along some cost increases and outsourcing more tires to China, though the 130-employee company hasn´t laid off anyone, according to Hebert. "It´s the same thing everybody else is doing," he said.
Maurice Taylor Jr., CEO of Titan Tire Corp. and Titan International Inc., said his total raw materials costs increased a minimum of 30 to 36 percent between August 2005 and May 2006.
"That means a 15- to 18-percent increase in the price of your product if you just want to recover your costs," Taylor said. A lot of companies would increase prices in 5- to 8-percent increments over a period of months, he added, but Titan just makes the price increases it needs to make all at once.
"The way I operate, I want you to tell me the facts, and tell me them now," he said. "It´s better to go in one time and have it done. Your customers´ purchasing people will yell at you, and tell you what a so-and-so you are-that´s their job, anyway. But they´ll say, ´You´re a rotten so-and-so, and, by the way, we need more tires.´ Because you´re no good if you go out of business."
Michelin has just raised its estimate for raw materials price increases this year to 15 percent from its original projection of 11 percent.
Earlier this year, Edouard Michelin, Michelin CEO and managing partner, said the tire maker would have a harder time meeting its profit goals in 2006 because of raw material price increases. Today the company said its vision for 2006 fundamentally remains unchanged.
SR prices have increased much less than NR prices despite the high cost of petroleum, the company said. SR price increases are based on supply and demand, whereas NR price hikes have more to do with heavy speculation and environmental factors, it said.
"Given the precise formulations of our tires, Michelin has little ability in the short term to switch between natural and synthetic rubbers," the company said in a written statement. "Through a combination of continuing manufacturing efficiencies and appropriate price increases, Michelin intends to offset these rising costs while maintaining its profitability."