Synthetic rubber demand, prices expected to increase

Synthetic rubber demand is expected to rise in 2014, which in turn will increase its price as well as its feedstock price, specifically butadiene.

After a year of sharp decline, butadiene prices are projected to increase gradually throughout 2014, according to William Hyde, senior director of olefins and elastomers at global chemical consulting firm IHS Inc. Hyde projects the increases in 2014 will offset declines in 2013 to return butadiene prices to around the level they were at the end of 2012.

"I think demand is going to strengthen somewhat for synthetic rubber, which will tighten the feedstock market up a little bit," Hyde said. "I think we should see pricing increasing gradually earlier in the year and perhaps faster in the second half than the first half."

Hyde said the volatility of rubber feedstocks likely will not reach the levels of 2011 or 2012, and that most of the change will focus around the butadiene markets. He estimates about 60-65 percent of butadiene goes into synthetic rubber. Synthetic rubber markets are big drivers of the butadiene price.

But butadiene still is probably going to experience some volatility. James McGraw, managing director of the International Institute of Synthetic Rubber Producers, can't remember a time when that wasn't the case.

"Butadiene bounces around all over the place," he said. "It's going to continue to be volatile based upon a number of factors. It's hard to say where the price of butadiene is going to go, but I can tell you it's going to be volatile."

McGraw said one factor is the use of lighter feedstocks by crackers and refineries in ethylene production because of shale gas being readily available. The switch to lighter feedstocks means there is less butadiene being produced as a byproduct of ethylene.

Unlike butadiene, other feedstocks such as ethanol and propylene have larger markets than synthetic rubbers such as EPDM. For example, Hyde said half or more of styrene goes into the polystyrene market in some way, shape or form.

"When you're looking at the impact of trends in the rubber market, the other feedstocks are just along for the ride," Hyde said. "The butadiene market is really where the synthetic rubber market has an impact."

Hyde said the growth on the rubber raw materials market won't bounce back to a historically normal growth rate, which is about 5 percent. But he projects that 2014 should be better than the last several years.

He cites a strengthening global automotive sector as a main reason, which is the second largest consumer of synthetic rubber after the tire industry.

Hyde also projects that the overall economic performance of world economies will factor into the growth. Europe is expected to perform better than it did last year. The same goes with the U.S., China and most of the developing world such as India and Brazil.

"All of these areas we think will see better economic performance in 2014 than 2013," Hyde said. "We have some GDP-based optimism and some sector optimism. I think the combination of those two things are going to cause the markets of synthetic rubber and synthetic rubber feedstocks to grow."

While shortages are caused by a variety of reasons—such as natural disasters—Hyde said supply is ample to meet demand. But he cautioned that the Chinese market is critical for synthetic rubber. If the market is strong, synthetic rubber supply could be tight, but if its economy disappointed, for whatever reason, it could create a surplus.

The Association of Rubber Products Manufacturers conducted a survey among its members, which includes more than 50 companies. Most respondents said they did not experience a significant change in raw material prices for the fourth quarter of 2013, but respondents also indicated they expect price increases in 2014.

ARPM Executive Director Troy Nix said one of the biggest challenges is figuring out how to avoid passing the cost onto customers.

"Sometimes people look at the increase in raw material pricing as automatically passed down to the customer, so it becomes a net loss of zero," Nix said. "That's not the case. Often times, especially with small- to-mid-sized companies, there is a strategy in place on whether or not they're going to approach their customer to try to pass that through. This is something everyone has trouble with."

Nix said another key for companies to combat raw material volatility is buying at the right time and assessing when it is appropriate to stock up on a material while the price is low.

"You can not go wrong by improving the sophistication of your purchasing resources and your purchasing intellect within your company," Nix said. "In this day and age, the fluctuation in the marketplace is so great that if you don't invest in that, the market will catch you."