There's always been a strange relationship between the synthetic and natural rubber sectors of the industry. That dates back to the birth of the modern day synthetic rubber industry, with the U.S. government project that led to the development of viable SR materials to replace the natural rubber supply that was cut off during World War II.
Consumption of SR and NR are relatively equal in size. Demand for NR in 2018 was 14 million tons, just a tad higher than global production was for the year, according to the Association of Natural Rubber Producing Countries.
The International Institute of Synthetic Rubber Producers placed worldwide capacity for the various forms of SR at 20.4 million tons. IISRP said capacity utilization in 2018 was 74 percent, putting consumption at just above 15 million tons.
But much of the similarities end there. Synthetic rubber is produced mainly by large corporations that operate at highly controlled, sophisticated facilities around the world. The sector also is highly susceptible to the volatility of feedstock prices and availability.
On the contrary, more than 70 percent of natural rubber is produced in Southeast Asia, and of that, more than 80 percent is grown by small, subsistence-level farmers.
Further, SR makers say they can offer more controlled molecules that are better suited for high performance applications, claiming NR has more unknown properties and is better suited for more general purpose and low-end tires.
Still, there is enough interplay between the two material supply sectors and opportunities for substitution when price disparity grows too wide that NR and SR remain tied together in the market. For the producers of SR, that hasn't been good news in recent years as NR prices have remained low for an extended period of time. The situation dates back to the second half of 2011, since when NR stocks have been rising and average prices declining. Much of that is because the economics of natural rubber don't follow normal patterns.
Several attempts by the larger NR producing countries to keep supply down and boost prices have been unsuccessful.
Bill Hyde, an analyst for IHS Markit, was at a conference a few years back where an official from the India NR industry said there were about 10,000 NR farmers in India alone, with the average plot size a hectare and a half. Hyde said these farms aren't all that much larger than his back yard in a Texas suburb.
For these farmers, the top priority is feeding their families. So when prices go down, they tap more NR because they need to keep their income up.
Efforts by governments in such nations as India and Indonesia—the two largest NR producing nations—also have fallen flat. When they attempt short-term cutbacks in exports, the surplus production is placed in a warehouse somewhere, only to be put back on the market in a matter of months. When the larger nations make these efforts to cut supplies, smaller NR producing nations are quick to step in and fill the gap.
Don't look for this pricing correlation between NR and SR to end anytime soon, as Hyde projects NR to continue to have a negative impact on SR for at least the next three years.