'The perfect storm': COVID-19, climate setting up tough road for natural rubber

Last year was supposed to be the difficult one. This year was supposed to be the beginning of the recovery.

Instead, the natural rubber industry finds itself in the eye of the storm, the relative calm between bouts of strong headwinds and heavy rains, bracing for more uncertainty and upheaval in the years ahead.

That's not to say that NR hasn't faced its share of challenges in recent years. Mercurial pricing and climate implications have weighed heavily on smallholders, who produce around 85 percent of the world's natural rubber. And these root issues, which caused fissures in the foundation of the industry, were exacerbated with the COVID-19 pandemic.

Global measures intended to curb the spread of COVID-19 led to production slowdowns and stoppages, dramatically reducing demand for NR and causing prices to plummet.

As industries—particularly automotive and tire—came back online, NR demand rebounded.

But supply? Supply is dwindling. Especially as flooding and tree disease continue to cause loss of product.

"(I'm) worried about supply," Ryan Wiener, global head of sustainable development and strategic marketing for Corrie MacColl Ltd., said in an email interview. "Years of low prices have allowed demand to outpace growth in supply, and it's time the world realizes that the material, which is so vital in powering humanity's mobility, is scarce."

Securing NR not only is getting harder, it's getting more expensive. Supply chain bottlenecks caused by poorly placed shipping containers, trade imbalances and unusually high global demand for personal protective equipment, have left suppliers fighting for cargo space.

Tor Hough, CEO of Rochester, Mich.-based Elm Analytics L.L.C., said the costs to transport goods and materials have increased tremendously since the pandemic began. But natural rubber, in particular, is feeling the squeeze. What typically may cost $2,000 a ton to ship now may cost as much as $5,000 or $6,000 per ton, he said.

Hough keeps a close eye on the whole of the automotive supply chain, watching for early signs of potential disruption in an effort to give OEM clients the flexibility to respond early and adjust deftly when problems arise.

He's beginning to sound the alarm with natural rubber.

Take it all, he said—the pricing, dwindling supply, climate impacts and shipping costs—and you've got one heckuva storm on the horizon.

"You have what I call the perfect storm on natural rubber," said Whitney Luckett, founding president of Southland Rubber Inc. "This is the perfect storm we are talking about now."

What COVID-19 did
Natural rubber pricing has been a concern for years. The commodity—integral to everyday life and, particularly, to mobility—has been undervalued and under-appreciated, according to Wiener.

"Natural rubber is listed on the European Union's Critical Raw Material list, and to this point, there is no replacement material," Wiener said. "End consumers of rubber's estimated 40,000 products don't trace that product back to the tree, so the world isn't aware of its significance."

That undervaluation has weighed heavily on the smallholders—men and women who rely on NR harvests for their livelihoods. Low rubber prices have made it difficult for many of them to sustain their families, and over time many have turned to other commodities with greater returns, cutting into NR supply.

The Wall Street Journal, in a November report, said that in Singapore, NR pricing stood at $1.47 per kilogram on Jan. 1, 2020. By April 1—in the heart of the pandemic—pricing had dropped to its lowest levels of 2020, about $1 per kilogram. From there, it did rise fairly steadily, peaking at $1.87 per kilogram on Nov. 1.

Data from the Association of Natural Rubber Producing Countries shows that 2021 began about where 2020 did, with Malaysian rubber prices around $1.43 per kilogram. Those prices peaked March 15 at $1.71 per kilogram, jumping about 22 percent in a matter of days. Industry experts expect pricing to remain strong in the months ahead as demand continues to rebound.

ANRPC estimates that demand reached 1.1 million metric tons last month—a 47.5 percent improvement over February 2020.

Rebounds in pricing and demand haven't come quickly enough. Growers needed the money from the 2020 harvests, not only to sustain their families, but to sustain their crops.

Without the 2020 funding to plant new trees or care for mature crops, many plantations have gone unfertilized, leaving them vulnerable to disease. Ultimately, that means that the quality of this year's harvest is likely to be subpar, pulling supply levels down just as market pricing starts to rise.

Moreover, growers found no additional financial support last year, which may have typically helped to bridge the gaps in difficult times.

Hough said that global banks stopped financing all commodities during the heart of last year's pandemic, due to the losses they took within petroleum and palm oil markets. This left growers without access to capital that normally would have helped with hiring workers and caring for the crops of rubber trees.

But COVID-19 did something else economically. It gave China an advantage in the NR market.

China was hit first by the pandemic. As COVID-19 spread and the world was locking down for the first time, China was resuming manufacturing, making it a buyer when commodities prices were at their lowest. And because global production had slowed, China had little competition, allowing it to purchase in surplus.

"(China's) demand for natural rubber came back online when prices were artificially low," Elm Analytics notes in a video detailing the challenges ahead for natural rubber. "So, like any shrewd business person, China bought more than it needed because the price was right."

Elm Analytics estimates that China has control over 70 percent of the world's natural rubber, which could lead to further shortages and higher prices in the years ahead.

Global shortages
Shortages appear to be the trend for NR this year. Globally, no region is immune as each is being impacted by adverse climate factors—such as flooding or dry seasons—as well as tree disease.

"Currently, (we're) seeing issues in Indonesian supply due to the severe flooding in Kalimantan during January and February," Wiener said. "Thailand is going into a dry and hot wintering season, (and) Africa, for the first time in many years, is experiencing a shortage of rubber."

Although it's possible that supply and demand will balance this year, the years ahead could be trickier, Wiener said, offering what he noted were trend-driven insights rather than official forecasts.

"Over the next five years, we see demand potentially exceeding supply, leading to a shortfall of close to 900,000 tons by 2027," Wiener said.

Thailand and Indonesia are perhaps the most at risk in terms of subpar harvests, according to Wiener. In addition to the white root disease that has affected the regions' rubber trees, both areas also are battling adverse weather conditions, which further reduces the harvest there.

In southern Thailand alone, the losses from these factors could be as high as 300,000 tons.

Luckett, likewise, is seeing shortages on the horizon.

"Dry rubber latex grade is in short supply," Luckett said. "In general, because prices are so high, importers or distributors are not maintaining (enough) inventory of natural rubber. It is going to become tough to get."

While there are plenty of factors that lead to natural rubber shortages, Luckett contends the heart of the issue isn't just the lack of supply, it's the length of the supply chain. Lean manufacturing operations don't work efficiently when the just-in-time supply chain stretches across the globe.

"There needs to be a recognition that just-in-time is not a way to go when it comes to a 15,000-mile supply chain," Luckett said. "That's the bottom line."

Hough agrees, especially with a commodity like natural rubber that is vulnerable on so many sides, including climate, market conditions and shipping concerns. He contends North America needs to devise a more reasonable way of tapping into a steady supply of NR.

"I think the biggest issue for North America is establishing a sustainable onshore supply," Hough said. "Without a national stockpile there needs to be some kind of mechanism that makes it commercially possible for that intermediate to handle those onshore inventories of rubber."

Reasons for optimism
Looking ahead, Wiener sees several reasons for concern, but a few stand out. Near term, he said, shipping bottlenecks are going to have the most immediate impacts on the industry, but those eventually will work through.

Longer term, Wiener said, he's most concerned about the smallholders.

"The volatility of the rubber price, especially when prices soar, working capital requirements rise which could potentially pose a real challenge to the smaller players," Wiener said.

Taking care of the smallholders responsible for 85 percent of the world's natural rubber should be a top priority industry-wide, he said. And that requires a "fair and equitable supply chain."

Luckett also lists the financial impacts on smallholders as being among her top concerns. Without proper pricing, they can't be ensured an adequate living standard let alone care for their crops.

Still, she's choosing to see the silver linings to the dark clouds on the horizon. While the months and years ahead will be difficult, she thinks the natural rubber industry will be better for having weathered the storm.

"I think, honestly, that natural rubber prices and the price they have been at over the past 24 months is not sustainable," Luckett said. "… I think that natural rubber prices should come up, and they have, and that's good. … I think the glass is half-full, but only for the sustainability of natural rubber in the long term."

Hough remains incredibly concerned about the near-term challenges and the impact they could have on the NR industry overall, but his faith in market dynamics is keeping him optimistic.

"I kind of feel, myself, like it will get worse before it gets better," Hough said. "But I will fall back on the general wisdom that the market always finds a way to solve the problem."