War in Ukraine disrupting rubber, auto, tire sectors

Russia's invasion of Ukraine was a geo-political flashpoint that has left an indelible mark on the tire, rubber and automotive industries.

The war is compounding a years-long series of events that have led to supply chain bottlenecks, materials shortages, price hikes and even labor shortages. And with Russia's position as a key player in the petrochemicals and synthetic rubber industries—particularly in Europe—the war is likely to impact the global rubber sector in the months ahead.

To what extent, however, remains to be seen, according to Bill Hyde, IHS Markit's executive director of olefins and elastomers. Because it all depends on where Russian President Vladimir Putin—and the rest of the world—goes from here.

"From a butyl rubber standpoint, I don't see this being a factor at all. Even for SBR and BR, those units inside of Russia have been running at relatively low operating rates, so there is a lot of flat capacity," Hyde said. "And raw material availability—butadiene availability, styrene availability—is better. … In fact, butadiene, globally, has been on the long side.

"So, I'm not concerned about near-term feedstock supply to synthetic rubber plants, and I am not concerned that there is not enough synthetic rubber production capacity, even if we shutdown all of the Russian exports."

The International Institute of Synthetic Rubber Producers believes the SR industry will be impacted by the war, but has not sorted out exactly what the impacts could be, given the complexity of the situation.

"Today it is difficult to predict the impact level on the global SR market because it is also dependent on how the world economy, oil prices, inflation and synthetic rubber consumption will be impacted by the events in Ukraine," IISRP said in an e-mailed statement to Rubber News. "In addition, the possible lower availability of synthetic rubbers produced with lithium catalyst-based technology must be considered."

The association also is waiting to make a decision regarding its Annual General Meeting, scheduled for the week of May 16 in St. Petersburg, Russia. The IISRP said it is following up on its members' opinions, and the executive committee will make a decision soon.

Simply, there is plenty at stake for the petrochemicals and synthetic rubber industries. How much, though, depends on how the dominoes fall.

As of now, Hyde said, the synthetic rubber industry has the capacity and the ability to navigate the supply chain and feedstock disruptions that result from Russia's invasion of Ukraine.

"We don't think that there are any major petrochemical assets that are in harm's way," Hyde said. "Ukraine does have some assets, but when we think about the synthetic rubber and the feedstocks that go into synthetic rubber, the vast majority of the production in the region is outside of where the conflict is currently.

"We don't look at it and say this petrochemical complex is a high value target. We don't expect assets to be damaged."

That is, Hyde added, as long as this remains isolated to Russia and Ukraine.

Poland, for instance, has a number of facilities that, if shut down, could have more significant impacts on the global synthetic rubber industry.

To date, the global sanctions against Russia haven't drastically impacted the petrochemical or synthetic rubber industries. If that changes, though, there could be some rather significant repercussions.

According to a Feb. 24 report authored by Argus Media Group analysts Angie Joe and Steve Williams, Russia exported about 60 percent of its polybutadiene rubber in 2021 (about 258,000 metric tons in all), with the top five importers being India, Turkey, Mexico, Poland and Romania.

European Union nations—Belgium, Portugal and Lithuania—saw the greatest increases in their exports of Russian PBR last year. One trading source estimated that Western Europe received 145,000 tons of Russia's total exports in 2021, according to Argus.

And when it comes to isoprene rubber, Russia is the globe's largest producer, having exported 275,000 tons of IR last year.

Again, Europe has the most to lose should it come to reductions in imports of Russian IR. Argus reports that the EU 27 (excluding the United Kingdom), imported 145,000 tons of IR from outside of the EU 27, and Russia supplied almost 92 percent of that.

Poland, Germany and Romania, Argus noted, are Europe's largest recipients of Russian IR.

By Argus' estimates, the U.S. imported 17,000 tons of IR last year, up from 13,000 tons a year earlier. Russia accounted for about 68 percent of the total imports. When combined with Japan, the two countries accounted for about 95 percent of America's IR imports.

Finally, Russia remains a key producer of treated distillate aromatic extract, which is used to produce some grades of emulsion styrene butadiene rubber 1700 series, nitrile rubber and PBR.

The petrochemicals and synthetic rubber industries aren't alone in feeling the impacts of the war. Already, the European automotive sector is feeling the repercussions of the Russian invasion with the loss of key parts from manufacturers in the Ukraine.

Bloomberg and Reuters reported that Volkswagen has been forced to slow or idle production at plants in Germany as a result of Ukraine suppliers being down. The impacts on production plants in Wolfsburg, Emden and Hanover have affected the manufacturing of the top-selling VW Golf and some VW commercial vehicles.

BMW also has been forced to suspend production of some engines and vehicles in Germany and throughout Europe.

Volvo meanwhile, was the first auto maker to stop shipments of vehicles to Russia. A spokeswoman told Reuters that Volvo supplies Russia with cars built in China, Sweden and the U.S.

Last year, the auto maker sent 9,000 vehicles to Russia.

Since then, Honda, General Motors, Ford, Toyota, Renault, Jaguar and Aston Martin have stopped doing business with the country.

From a global trade perspective, Russia isn't a major player in the import and/or export of goods and products, according to Bill Wood, founder of Greenfield, Mass.-based Mountaintop Economics & Research Inc.

To that end, there shouldn't be any significant disruptions to products such as electronics going into or out of Russia, though companies including Nike Inc. and Apple Inc. have stopped sales in the country.

"(Russia is) a commodity exporter. They don't import a lot of products, they make a lot of their own stuff," Wood said. "But one of the commodities they have a lot of is energy, so oil and natural gas (could be impacted)."

Given the strength of Russia's energy sector, Wood expects energy prices to surge, particularly in Europe where natural gas prices are most closely tied to Russian supply. Globally, he expects to see some ripple effects with natural gas and crude oil pricing as well.

Hyde is seeing the same.

Although it's too early to tell exactly how much prices will jump, Hyde said he wouldn't be surprised to see crude oil price hikes between $15 and $20 per barrel. Prices, he added, are likely to stay around $100 a barrel for the rest of the year—near the price point ahead of Russia's attack on Ukraine.

And while sanctions have yet to touch the energy sector, private companies and European countries have been aggressive in dialing back their business with Russia.

"What has happened is self-imposed sanctions by a number of private companies, like BP and Shell, that are divesting significant holdings in Russia," Hyde said. " … One of the bigger surprises to me has been how aggressive the countries in West Europe have been to announce significant moves away from Russian oil and gas. As we discussed last week, it isn't possible for them to go all the way, but they can trim back Russian volume today and work to put capability in place to go all the way eventually."

And when it comes to the impact of the price increases, Europe is most likely to take the hit.

"European rubber producers will feel this more than anyone else because of the high natural gas price that is currently in Europe," Hyde said. "We thought it would ease some as we get out of the winter, but with this conflict I don't see much downside. In fact, there is more upside to the European gas price, which of course plays into electricity, it plays into steam, the utilities that these guys have, their plants all along the value chain from the butadiene producers to the ethylene producers to the synthetic rubber producers and tires."

Ultimately, Hyde said, any price increases that manufacturers and suppliers realize will hit the consumer, especially when it comes to tires.

According to Rubber News data, there are seven international tire makers with operations in Russia, Nokian Tyres P.L.C. among them. The Finnish tire maker said Feb. 25 that it was preparing for potential disruptions to Russian operations and supply chains and had enacted a plan to move production from Russia to plants in Finland and the U.S. The move was intended to bring some production closer to customers.

"We are also monitoring closely the development of sanctions and potential counter-sanctions," Nokian said in a Feb. 25 statement. "We have activated our contingency plans to mitigate the financial and operational impacts to our business. For example, we are shipping tires closer to our customers, securing the raw material supply to our factories, transferring production of selected key product lines from Russia to Finland and to the US, and securing transport capacity from Russia with existing and new service providers."

Nokian is the only tire maker to detail possible changes to Russian operations. Others are: Bridgestone Corp., Continental A.G., Michelin, Pirelli & C. S.p.A., Titan International Inc. and Yokohama Rubber Co. Ltd., along with some domestic tire makers.

While there are some domestic tire makers in Ukraine, none of the major tire makers operate plants there. Should the conflict spread to Poland, two Bridgestone plants and one Michelin plant would be impacted, along with several domestic tire makers.

Nokian also has pulled its financial guidance for the year, saying it was not yet prepared to offer a new outlook.

"The Russian military actions in Ukraine and the consequent sanctions have caused significant uncertainty related to Russia, to the functionality of the Russian financial and payment system, and to the Russian ruble exchange rate," Nokian said. "Therefore the Board of Directors of Nokian Tyres P.L.C. has decided to withdraw the company's financial guidance for 2022 published on February 8, 2022. Due to the prevailing uncertainties, the Board is not in a position to give a new guidance at this moment."

Bruce Meyer, Rubber News Staff; Automotive News; and European Rubber Journal contributed to this report