Key notes: 5 views from Bill Hyde on feedstock costs

KNOXVILLE, Tenn.—When it comes to feedstocks for synthetic rubber, one axiom that holds true in many cases is that rubber industry demand really doesn't impact pricing that much.

That's because in many cases, such as with butadiene, the supply and pricing is left to the mercy and needs of other sectors, according to Bill Hyde, vice president of olefins and elastomers of Chemical Market Analytics.

Hyde gave his address at the ACS Rubber Division International Elastomer Conference in Knoxville under the Chemical Market Analytics company moniker, which was the base chemical group that was formerly part of IHS Markit. That unit was acquired by Dow Jones as part of the divestiture required when IHS Markit merged with S&P Global.

Here are five takeaways from his talk.

1. It all starts with energy
Hyde said his group tracks the index for a range of regional crude indexes, where the actual price isn't necessarily what matters, but more how prices move relative to other things, whether it's other regions or competing materials.

"Our view looking forward is that crude oil is going to come off a little bit over the next few years," he said.

But it will be closer to the levels seen in 2012-13, rather than the low prices of the pre-COVID, 2015-19 time period.

"Things bounced up much higher and much faster than anyone would have thought, primarily because of the Russian invasion of the Ukraine," Hyde said. "Now what we're seeing in crude oil supply is actually constrained as producing countries looking forward at a relatively weak demand outlook, are now saying we're going to cut production to maintain a tighter market balance so pricing stays higher."

The chemical analyst said natural rubber is forecast to come down, and on a BTU basis, likely will cost 30 percent of what crude oil is. "That's important because that means the ethylene production that we have here in the U.S. that is predominantly based on ethane cracking will continue to have the economic advantage that it's had," Hyde said. "If those numbers were up more like 80 percent, then you start to worry about production and the viability of the U.S. producers relative to their international competition.

He added that variable costs have forced a number of synthetic rubber producers to announce production cutbacks in some of the commodity grades, and they can't pass those along to customers.

2. Ethylene always the center of attention
Ethylene is the center of the petrochemical universe, Hyde said, because it's produced in most regions of the world. The largest capacity is in the China/Northeast Asia region, followed by North America, the Middle East and Western Europe.

Ethylene demand primarily is driven by trending demands in polyethylene, while those producing EPDM and others who are making or consuming synthetic rubbers that is a co-product of ethylene, don't "move the needle of ethylene demand," Hyde said.

There have been a number of capacity additions in the last five years, with much of that in North America. "What you see is they added more capacity than what we did," he said. "And if you add up all that surplus capacity, the market is not set to come back into balance. We're not going to absorb all that capacity."

3. Butadiene, styrene pressures
There have been no investments in North American butadiene production capacity, the analyst said. Most of the added capacity has either come in China or elsewhere in Northeast Asia. Butadiene took a big hit in 2020 and rebounded in 2021, but the outlook is that demand will ease off, adding to a significant surplus of capacity.

" For the consumers of butadiene, especially in Northeast Asia and North America, this will work to your benefit," Hyde said. "Because deep water trade will become a much smaller part of market, butadiene monomer imports into North America are coming off. Mainland China has switched from being a net importer to being a net exporter, and the rest of Northeast Asia will continue to import pretty significantly."

Because butadiene is such a small factor in the overall cost of a tire, there is no correlation between supply of the feedstock and the cost of the tire. "You can't discount your butadiene enough to stimulate end use demand," he said.

As for styrene, overcapacity has had downward impact on operating rates for years, according to Hyde. And now there have been capacity additions, particularly in China.

"Styrene demand is growing much more slowly than capacity additions. So that cumulative surplus, not only do we never really resolve it, we're looking at 2024 or so until we start to see any real improvement in it."

4. Sustainability? Patience please
A lot of what Chemical Market Analytics is seeing in the value chain is related to sustainability and energy transition.

"What's driving this? Public sentiment is. Government is," he said. "Clearly economics are not, because if any of you have tried to buy a circular or bio-based feedstock to replace fossil fuel feedstocks, nobody's offering those at a discount. The question is, how much are you willing to pay? Or how much more is your customer willing to play?

Hyde said technology isn't where it needs to be for perfect sustainability, "which is one of the reasons most of the tire companies are saying that their circularity targets are between 2045 and 2050, because it's hard."

"We need more R&D. We need a massive infrastructure transformation," he said. "It's not just about power generation, but it's also about power transmission, and how do you get all this electricity from where you're going to make it to where you're gonna consume it. Perhaps what we need more than anything is patience as we move through this process."

5. NR pricing not sustainable
Hyde said natural rubber currently isn't at a sustainable price position because the farmers can't make a living.

The industry also is at an interesting point in terms of developing alternative forms of NR. "But we feel like we've been in that place for about 10 years. We've been talking about dandelions, we've been talking about guayule, and there is some production," he said. "But it's always one of those things that's five or more years away.

"All the tire companies are making investments in it, they're all pursuing different alternatives. But they're not there yet. We're right on the edge, I think—we're a leaf blight away from having a real problem in natural rubber that we can't recover from. But at least for now, it feels like the natural rubber balance is a little long."

He added that natural rubber is a commodity that has negative price elasticity because 80 percent of NR is supplied by small farmers, and they have to eat.

"So when natural rubber prices go down, they have to maintain their income level—not per unit income level, but their income level," he said. "What do you do if you need more income? You sell more if your price goes down. If you sell more, what does that do to the price of your commodity? It pressures it down."