The world's synthetic rubber industry has slipped into production overcapacity fairly often during its 70-some year history. This time, the reasons behind the phenomenon, and its future ramifications, are different.
The recurring cycle in the past was this, according to industry participants and analysts: Synthetic rubber producers would build capacity to feed a growing need for the material, particularly from tire and automotive customers. Then demand slipped, and all the negative aspects for that end of the cycle for SR makers would take place—falling rubber prices, production cutbacks, layoffs, plant closings.
When things got bad enough, the number of players was winnowed out, too.
Today on paper it looks the same: weak prices, not enough demand, lots of unused capacity with even more SR lines and facilities on the way. It's a scenario that James McGraw, managing director and CEO of the International Institute of Synthetic Rubber Producers, warned organization members—most of the world's SR makers—was coming.
“Probably one of the biggest challenges we're looking at is overcapacity,” McGraw said in a recent interview. “In a number of speeches I have been giving around the world, I've said that we are building toward a time when we're going to have excess capacity, and it's primarily coming out of Asia.”
During McGraw's 40 years in the SR industry, he has seen the cycle in play. “We've gone through cycles when there is overcapacity, and then rationalization, and then we start to build capacity again.”
The first oddity in the latest overcapacity situation is the rebound from the last worldwide recession—or lack of one.
“Recovery from recession has been much slower than we would have expected,” said Bill Hyde, senior director of olefins and elastomers at global chemical consulting firm IHS Inc. “So demand growth has not come back as quickly.”
Building an SR plant or boosting production at an existing facility takes time. The analyst—who tracks butadiene-containing rubbers such as solution and emulsion SBR, polybutadiene and to some extent, butyl—said SR producers have been adding capacity to meet the expected demand of five years down the road.
Demand today isn't where they anticipated it would be, he said. The results of the slow consumption levels are what can be expected: weak prices and poor plant utilization rates. “Operating rates for SSBR I'd definitely have to put below 50 percent nameplate capacity globally, probably approaching the low 40s,” he said, with some companies doing better than others.
Weak demand means weak prices. “I don't think SBR has found the bottom yet,” in the U.S., said an industry source who asked not to be named. He said look to butadiene prices to get an indication of how things are in the butadiene-based rubber business.
“Butadiene prices have been falling. If butadiene prices are dropping, that's not a good sign for the SBR industry, and it tells you something about demand, because butadiene goes into SBR and polybutadiene,” he said. “Butadiene prices are down not because they added a bunch of BD capacity, but because demand is down. I would say SBR margins are under pressure right now.”
Another unique factor that has helped create SR overcapacity is natural rubber. The world is awash with Hevea rubber, and that has had a negative influence on the price of SR, which competes with NR.
“Synthetic rubber margins are weak and SR producers can't raise prices because if they do, that demand just goes into the natural rubber space,” Hyde said.
And then there is the gorilla in the room whenever discussing the SR industry—China.