You've probably heard of the butterfly effect in terms of weather: If a butterfly flaps its wings in Africa, it starts a reaction that results in a hurricane eventually kicking up in the Caribbean.
The point is that a small change in weather in one location on Earth can launch a big change elsewhere.
It also works in natural rubber. Always has. For example, flooding in Southeast Asia reduces tapping, which curtails supply, raising the price of NR, which gives the purchasing manager at a tire company indigestion. Conversely, if tire demand is sluggish in North America and Europe, Southeast Asian NR producers are stuck with stockpiling and lower prices.
The butterfly has been flapping away in Asia for a couple of years now. Prices for Hevea rubber fell by half in the last few years and tumbled 30 percent in the first quarter. That's bad news for Southeast Asia smallholders, the people who produce most of the NR. And it's good news for rubber product makers in the West who use the stuff.
Like most things economic, China is the big factor in the supply-demand situation in NR today. They are making a lot of tires in China, and tires use up maybe 60 percent of all NR produced. They grow some, but hardly enough, NR in that nation, so China is the world's biggest importer of the commodity.
However, the huge economic engine that is China is slowing from its double-digit-growth days. China NR imports remain high, but the NR producers of Southeast Asia did a lot of planting in anticipation of China's continued growth, back when it looked like there eventually would be a shortfall of NR.
Well, there isn't. In fact, there's been a glut of NR on the market for about four years. Which is why NR prices, if you're on the supply-side of the business, are awful.
Another butterfly is beating its wings in Vietnam. The Vietnamese government decided NR is a good business, and about seven years ago it began a massive Hevea planting campaign. The imminent entrance of rubber from those now-mature trees into the market likely will reduce prices further.
And that's not all. Thailand, the world's largest NR supplier, has decided to unload 220,000 metric tons of rubber it has stockpiled, bringing more pressure on pricing. This from one of the three members of the International Rubber Consortium—Indonesia and Malaysia being the other two—a cartel of the largest NR producers formed to support prices. Obviously, they haven't been succeeding.
All of which gives that tire company purchasing manager a settled stomach and an appreciation of butterflies.
Noga is a contributing editor for RPN and its former editor. He can be reached at [email protected]