Critical, yet fragile: Navigating risks, seizing opportunities along the NR supply chain

In 2004, the History Channel's "Modern Marvels" series aired an episode dedicated to one of the world's most critical natural resources.

"Some experts contend that rubber is the fourth most critical resource in the world after air, water and oil," states the episode, which originally aired June 8, 2004.

"I like this quote because it's not me saying it," Katrina Cornish, director of the U.S. Arid Lands Agricultural Research Center and longtime advocate for the security of NR and development of domestic alternatives, said at the recent ACS Rubber Division Spring Technical Meeting.

If you were to ask the average person on the street what they thought were the four most important natural resources in the world, she added, "they might get air and water. Hardly anyone will get petroleum. ... But nobody gets rubber."

Yet, every year, the world uses more and more of this critical material that is derived from the hevea brasiliensis tree, grown predominately in Southeast Asia and native to the rainforests of the Amazon.

In fact, over 50,000 different products are dependent on it.

But what really drives the growing demand for NR, Cornish said, is the transportation sector due to rubber's use in tires. "And with EVs coming along, we're probably going to be needing more natural rubber in these tires because they need to be high-performance."

As of its June report, the Association for Natural Rubber Producing Countries forecast global natural rubber demand to reach 15.7 million metric tons for 2024. That's up about 3 percent compared to demand for 2023.

And of this, the tire industry absorbs more than 70 percent of NR, which makes up between 20 and 40 percent of the weight of a tire, depending on the segment, according to the European Tyre & Rubber Manufacturers Association.

"I've worked (with) a lot of different elastomer systems in my career ... and there's nothing like hevea rubber," Howard Colvin, rubber industry consultant at Colvin Consultants, said in a panel discussion on the outlook of NR during the International Tire Exhibition & Conference in May.

"The idea that it undergoes strain crystallization is important, the idea that strain crystallization happens at the right rate is also a very important feature of it, and that allows us to make compounds," he said, calling hevea an "absolutely indispensable" material.

So, yes, hevea NR is one of the world's most important natural resources, as "Modern Marvels" pointed out over two decades ago.

But, it added, it also is "perhaps the most fragile."

While the ANRPC in June had projected global NR demand for 2024 to be about 15.7 million tons, it revised down its global outlook on the supply side to 14.5 million.

The association cited reduced interest in the crop from farmers from traditional producing countries like Thailand, Indonesia and Malaysia, as well as risks facing hevea such as climate change, leaf diseases and persistently low prices.

No. 1 on this list, according to Cornish, who also spoke on the ITEC panel for the outlook of NR, is the risk of crop failure due to hevea's monoclonal nature. This means the trees from which latex is harvested today are genetically identical, making them highly susceptible to plant diseases, like South American Leaf Blight (SALB).

"It's a disaster just waiting to happen, and we got a full warning of it in 2019," Cornish said, citing the Pestalotiopsis and Neofusicoccum blights that hit Thailand.

In just six months, the blights spread to over 1 million acres across seven countries. This resulted in a 10-percent drop in NR production in 2020.

"If it weren't for COVID closing down tire factories and transportation, it might have gone a lot worse," Cornish said. "And that wasn't even SALB."

SALB is a fatal leaf disease to hevea, endemic to Brazil. And if it gets into Southeast Asia, "we could be in big trouble," Cornish said during the Rubber Division Spring Technical Meeting.

For years, the risk of SALB reaching Southeast Asia was low due to a lack of direct flights to the region from Brazil.

"The SALB spore can only live for about five days, so it can't make the ocean cross," Cornish said.

In October 2020, however, this risk has "substantially increased" following trade talks between Brazil and China, she said, that opened direct flights between endemic SALB regions and Southeast Asia.

In addition to being susceptible to disease as a monoclonal crop, hevea NR is severely undervalued.

Whitney Luckett, president of Simko North America L.L.C., a rubber supply chain solutions firm in Colorado Springs, Colo., said the price of rubber has stagnated for the past 30 years.

"The price of natural rubber last November was the exact same as the price of natural rubber 32 years ago," she said at ITEC. "It remains completely undervalued on the world stage."

And these low prices also contribute to crop failures, according to Cornish.

"This is why we lost so much acreage in the last six months of 2019. Not enough money was going into crop maintenance," she said. "These trees were already pretty sick and unwell and half-starved when the Pestalotiopsis and Neofusicoccum blights hit.

"If more money was going down the chain to the producers, those would have been healthy trees and much less likely to have collapsed in that way."

Between the risk of disease and low prices, it's no wonder some producers are turning away from NR.

In Indonesia alone, Luckett said, 46 out of 130 rubber factories shut down over the last two years "due to lack of raw material and just low prices not making it worth production."

Eighty-five percent of natural rubber is produced by about 6 million smallholders who independently own between 1 and 3 hectares each, according to the Global Platform for Sustainable Natural Rubber.

"When you look at the greater geopolitical importance of natural rubber, you have to remember that it comes from countries that are basically underdeveloped or developing, and it feeds an awful lot of people," Luckett said. "Their tappers are out there at 3 in the morning tapping trees, and it keeps the peace in a lot of these countries."

The crop is essentially their livelihoods, and if smallholders can't make a living off NR, they must seek alternative sources of income.

"They turn their smallholding into rubber wood and sell that off. That's how we get palm oil," Cornish said.

Indonesia is the world's largest producer of palm oil, producing more than half of the global palm oil market, according to the U.S. Department of Agriculture's Foreign Agricultural Service.

"High yields, low cost and stability of palm oil makes it the most widely used vegetable oil in the world," according to a November 2023 USDA commodity intelligence report. "Global production of the commodity is steadily rising in response to population growth and policies that promote the use of palm and other oils in biofuels. Due to this, palm oil production in Indonesia has increased by 400 percent over the past two decades."

The USDA estimated Indonesia palm oil area to be at 13.5 million hectares in the marketing year 2022-23, up from 3 million hectares in 2000-01.

"During this period of rapid expansion, areas planted to rubber and other crops were replanted to palm oil," according to the report.

"With palm oil, it's a faster crop, you don't have to wait seven years (to harvest it), the prices are more stable, it goes into a lot more products," Colvin said, noting hevea trees take up to seven years to mature enough for harvesting.

If the barrier to exit growing hevea and to enter the palm oil industry wasn't so large, he added, "we'd be in a major world of hurt right now."

And on top of all these risks and challenges, Luckett said, is the "advent of EUDR."

That's the European Union's deforestation regulation, formally the EU Regulation on Deforestation-Free Products, which entered into force on June 29, 2023, according to the European Commission. It will go into effect for most companies Dec. 30, 2024.

"Under the regulation, any operator or trader who places (certain) commodities on the EU market, or exports from it, must be able to prove that the products do not originate from recently deforested land or have contributed to forest degradation," the EC states.

Commodities included in the scope of this regulation are palm oil, cattle, soy, coffee, cocoa, timber and rubber, as well as derived products (like beef, furniture, chocolate, etc.).

What this means for rubber, Luckett said, is essentially every cup lump going into Europe must meet three tenets.

"You have to be able to trace from tree all the way through to the manufacturer—every kilo of raw material, of cup lump—and you have to be able to place provenance on it," she said.

Even smallholders who own 2 to 3 hectares must present their deeds, stamped by a local authority. If that is not possible, they must show permission from the local indigenous authority.

"Then you have to ensure that the supply chain (works toward) the United Nations' global stability goals," Luckett added. "In other words, no child labor, no slave labor, etc."

The United Nations outlines 17 goals for sustainable development. Included in these goals is the elimination of poverty and hunger, ensuring good health and well-being, access to quality education, access to clean water and sanitation, and sustainable use of terrestrial ecosystems, among several others.

"Then you have to take—from this deed you have—the geolocation of the tree or the area of trees. That has to be superimposed over a map of deforestation that is approved by a global entity," she said. "And at that point, you can certify.

"There is this huge blockchain of data that has to accompany every kilo (of NR)."

This regulation, Luckett said, is likely to create a two-tier market, where some producing countries will be able to comply much easier than others. "And some countries are going to have a very, very big problem."

"This I think is a sea change and is the largest change we've seen in the natural rubber market since the '70s," Luckett said, when technically specified rubber was first developed.

There is about a 15,000-mile supply chain from Southeast Asia, Luckett said, where between 80 and 90 percent of the world's rubber is produced.

And due to geopolitical uncertainties with the ongoing war in Ukraine, conflict in the Middle East and Houthis rebel attacks in the Red Sea, shipping prices and wait times are increasing once again.

"I just got out of some very difficult negotiations with a tire manufacturer, trying to tell him that we had costed things out of Southeast Asia at $3,000 a box," Luckett said. As of May, estimates were then at $10,000 a box.

"(And) you can't move anything through the Red Sea, so all the container vessels now, they're having to go around the Cape of Good Hope," she said, noting this adds about 6,000 miles and between 35- to 40-percent in cost increases. "We're almost back out to 60 days out of Southeast Asia.

"The best thing you can do, though, is just make sure you have something on this side of the pond."

When it comes to alternatives to natural rubber, it's no secret what the top contenders are, especially for tire manufacturing.

Cornish noted during ITEC that taraxacum kok-saghyz, or TKS dandelion, and parthenium argentatum, known as the desert shrub guayule, are the leading alternatives for domestic natural rubber in the U.S.

But there are "plenty of other species" in the world that produce rubber, she said.

One company she knows of is working with sunflower rubber—although, this particular rubber has low molecular weight—and Kazakhstan is working now on mountain gum, which Russia used in World War II, she said.

At the Spring Technical Meeting, Cornish said there are over 2,500 species known to produce rubber.

"Many of them make good quality (rubber). None of them are in agricultural production," she said, both for "business reasons and technical reasons."

While there are many "proof-of-concept" alternatives to hevea, she said, the pathway to scale is a huge barrier.

"How do you scale? What can I do with 100 acres? What will make enough money to plant another 100 acres and increase my processing infrastructure from 100 acres to 200 acres? How do I take it from there and make enough money off that to get to 1,000 acres with the processing infrastructure increase?"

Yes, manufacturing tires will bring in profit, but you're not making tires with just 100 acres of rubber producing plants.

The trick, Cornish said, is thinking outside the box.

"Where can you get that really big margin that could fund an increase in acreage capacity, and then how do you get the next one when you've done that?" she asked. "We've got the seed, we've got the agricultural know-how, we've got the farmers, we've got the products. We don't have the middle piece. And that's expensive."

That middle piece, she said, is extraction and purification. "It's that processing infrastructure. That's where the money needs to go."

Another major challenge in scaling up alternatives, Colvin said, is the need to be in a co-product business structure, particularly with guayule.

"You can't make guayule rubber unless you're able to sell the bagasse," he said, noting that for every pound of guayule rubber produced, you get about 8 pounds of bagasse. And you make about as much resin as you do rubber. "If you can't sell the resin, you can't sell the bagasse, you can't sell the rubber.

"You have to build those businesses from the ground up, and you've got to establish credibility," he added.

Once a co-product business is established, however, this challenge can quickly become an opportunity.

Bagasse and resin can be converted to biofuels, Cornish said, noting there's a "huge market" for this. And the co-product for dandelion rubber is inulin. TKS makes three times as much inulin as it does rubber, which sells for about five times the price of rubber.

The pace at which the industry is approaching this today, however, is simply not fast enough. Between geopolitical tensions, climate change and looming threats to the global supply chain, the U.S.'s need to secure a domestic NR supply is ever present.

And the amount of the rubber industry made up of guayule today, for example, Cornish described as a "ridiculously tiny, minuscule, fraction of a percent of a percent of a percent.

"If we have 10 percent domestic production we can go from 10 percent to 100 percent quickly," she said. But if we've got but 1 (percent), we can't get to 100 percent replacement—however much money you throw at it—quickly."

From a processing standpoint, there certainly is plenty of room for improvement, Colvin said, but "we've got to get started somewhere.

"It's going to take effort. You're going to have to have government funding," he said, noting even Bridgestone, as big as it is, needs government funding for the work it's doing today to scale up guayule.

"It's so important to get it done before there's a major hevea … rubber tree collapse. Because there's no coming back from that," Cornish added.

"We have no interest whatsoever in replacing hevea; we are, however, adding to it," she said. "We are adding to the supply with the alternatives and putting that supply chain security in with the alternatives."

When it comes to the frustration level with where we are today in scaling up alternatives or dealing with the looming risks to hevea, Luckett pointed out that the onus is on all of us to bring security to the rubber supply chain.

"We really need to engage everyone," she said, adding that she's spoken to her congressmen about the need to prioritize these concerns.

And Cornish agreed. "I know it sounds a little ridiculous, but it's everyone's responsibility," she said, pointing out that there are federal grant programs available to companies, academia and associations for research in scaling up rubber alternatives.

The short answer is yes. The supply of NR today is still adequate, according to Luckett. "For the moment."

"Natural rubber always finds some way to bring itself back to equilibrium," she said, "which is why it's still a buck-sixty a kilo."

Europe's demand is sluggish because of Russia's war on Ukraine and China's demand is off "significantly," she said.

But as less developed countries and the continent of Africa develop more, Cornish countered, "there will be a lot more natural rubber needed by, say, 2050. We will need twice as much rubber as we're currently using. I don't think we'll be able to do it with (just) hevea. But, today, it's not hurting."

Colvin added that climate change is a largely underappreciated factor in NR supply.

"The impact of climate change over the next 10-20 years, it's going to be huge on the industry," he said.

Areas conducive to hevea growth now may not be fit in the future, and vice versa, he said. "My understanding is China is investing in (growing in) Africa because they're forward thinking."

Climate change alone, Colvin said, is enough to shake up the entire NR supply chain.

"How is climate change going to affect natural rubber supply? I don't think we really know the answer to that," he said. "It's going to be a detriment, though. It's going to be a net negative. How negative? It's too early to say."