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January 22, 2007 01:00 AM

NR roller coaster expected to continue

Miles Moore
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    WASHINGTON — Natural rubber prices have been on a roller coaster ride the past few years, and that probably will continue in 2007-though with more emphasis on the peaks than the valleys.

    The price of Standard Indonesian Rubber 20 — the grade of NR used most often by U.S. tire manufacturers — nearly doubled from about 60 cents a pound in July 2005 to almost $1.10 a pound, by July 2006.

    It fell again to between 65 and 70 cents in November 2006.

    Prices again have been climbing. On Jan. 15 the free-on-board, or at the port of origin, price of SIR 20 was 88 cents per pound.

    "We all think the market is going to look like last year," said one NR trader who asked to remain anonymous. "There´s certainly cause to be bullish."

    The fundamental supply-and-demand patterns of the NR market are likely to stay the same in 2007 as they were in 2006, according to market experts. The main variable lies in what speculators and mutual fund managers may buy or sell on the commodities markets in Tokyo and Singapore, they said. Also, the annual "wintering season"-during which Southeast Asian rubber growers curtail the tapping of their trees-may not last as long this year as last.

    "Goodyear has settled its strike, so it´s buying rubber again," the industry source said. "But the U.S. is not the country that´s driving the NR market. It´s the Asian ´tiger economies,´ such as China and India, which are really driving the market these days."

    It´s hard to tell whether the mid-2006 peak in prices will repeat itself in 2007, because that peak was speculator-fueled, according to Christophe Mazel, director of investor relations for Michelin.

    "The recent surge in natural rubber prices is mainly due to heavy rain in Indonesia and southern Thailand, and the beginning of the winter period during which the output is much lower," Mazel said.

    Because of new rubber tree plantings a few years ago, Michelin expects a better balance between supply and demand after 2007.

    In times of volatile NR markets, rubber product manufacturers try to stabilize their raw material costs by buying forward as far as they can, which is exactly what they did in 2006. But the source predicted there would be less of that in 2007 because buyers would try to wait for NR prices to drop.

    World natural rubber production increased at an annualized rate of 5.7 percent in November 2006, compared with a 4.3-percent annualized growth rate for synthetic rubber, according to the latest figures from the International Rubber Study Group.

    "With production outpacing consumption, global natural rubber stocks have been increasing steadily during the past six months," the IRSG said in its latest "Rubber Industry Report" on its Web site. "Nevertheless, stocks have only reached about 60 percent of the peak level in early 2000. World SR stocks, on the other hand, remained just below historical highs, despite a small deficit in production vs. demand."

    The IRSG expects a 6.2-percent annual growth rate for NR production through 2008, leading to excess supply. The organization doesn´t comment on pricing, according to Hidde Smit, its secretary-general.

    Unlike petroleum and other commodities, the NR market is not known for quick turnarounds. "Natural rubber is different from most commodities," one industry source said. "Production can only be adjusted five years out because it takes five years for new plantings to mature."

    Bridgestone/Firestone, however, regards natural rubber as a commodity like oil or natural gas, in that its pricing is extremely difficult to predict, according to Ken Weaver, vice president of finance for Bridgestone/Firestone North American Tire.

    "Natural rubber prices have been extremely volatile in the past few years," Weaver said. "We´re always trying to get some kind of predictability into the prices we pay for natural rubber and other commodities."

    Because BFS has a great deal of vertical integration-including its natural rubber plantations in Liberia and elsewhere-it has more price predictability built into its operations than most other companies, Weaver said.

    The firm does occasionally make physical forward purchases of natural rubber as the market situation dictates, but these by definition can´t be planned very far ahead, he said.

    BFS also has little leeway to reformulate its product compounds to take advantage of lower NR or SR prices, according to Weaver.

    "By the time we have an opportunity to reformulate a compound and test it for quality and performance, the prices have already flopped," he said. "You´ll always hear us talking about the quality and performance of the product first."

    Among other rubber product manufacturers, Freudenberg-NOK declined comment. Goodyear said it wouldn´t be ready to discuss its projections on NR pricing and supply until a conference call detailing its fourth-quarter financial results in late February.

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