Natural rubber producers and consumers

Dr N Yogaratnam

Natural rubber (NR) is an inseparable part of most rubber -based products like tyres and gloves. The tyre and other rubber based industries are currently reeling under the impact of high natural rubber prices.

Although, tight supply and growing demand for NR is here to stay on the long run, the need of the hour is to evolve well balanced strategies that are mutually beneficial for the growers and consumers so as to ensure the healthy growth of the industry as a whole.

NR production in key growing countries may miss estimates this year as supplies from Indonesia and Philippines is slow, according to the Association of Natural Rubber Producing Countries (ANRPC).

Output from member countries, representing 92 percent of global supply, may expand 4.9 percent to 9.94 million metric tons this year, less than the 5.8 percent gain forecast last month. Production last year was 10.03 million tons.

Lower supplies may help stem a 26 percent slide in rubber futures from a record 535.7 yen a kilogram reached on Feb. 18 and potentially increasing costs for companies such as Bridgestone Corp., Michelin & Cie. and Goodyear Tire & Rubber Co., the top three tyre makers.

The slowdown in natural rubber supply and the weakening of the Japanese yen have contributed to hold the price from falling further. Natural rubber prices are likely to stay fragile until global economy returns to a clear recovery path and the demand gains momentum.

October-delivery contract on May 26, rose 2.7 percent to settle at 396.1 yen a kilogram ($4,836 a ton) on the Tokyo Commodity Exchange. Prices have gained about 40 percent in the past year.

Production may increase 5.8 percent by end June, less than the 10.5 percent increase estimated last month, the group said. Supply jumped 10.1 percent in the first three months of the year.

Persistent rains

Persistent rains in southern Thailand, the biggest grower, have disrupted tapping, slowing the resumption of the rubber harvest after the traditional February-to-May low-production season.

Production in Indonesia, the world’s second-biggest grower, may be 2.89 million tons, 2.7 percent less than the April forecast of 2.97 million tons, the ANRPC says.

Exports from key producers may grow 3.2 percent this year to 7.71 million tons. Imports are expected to expand in China and Malaysia in the second quarter and may decline in India.

Demand from China, the largest importer, may jump 27.5 percent in the April-June period from a “low volume” in the year earlier. China’s rubber imports are predicted to total 245,000 tons in May and 235,000 tons in June, compared with 261,000 tons in April.

Imports of natural rubber by Malaysia in the second quarter may surge 23 percent, while purchases may tumble 43.1 percent in India, says the ANRPC.

NR price rise effects

Currently, global NR prices are in the region of US$ 5.50 to 6.00 / Metric Ton and Synthetic rubber prices are trading at record levels of US$ 3500 to 4000 / Ton. NR prices are, however, expected to stabilize around US$ 4.50 to 5.00 by end 2011.

Global NR latex consumption

Global NR latex consumption was 1.2 million tonnes in 2010, 9 percent lower than in 2009. Across the major latex consumers, Chinese, Malaysian and Indian consumption dropped by 9.9 percent, 4 percent and 2.4 percent respectively in 2010, driven by rising NR latex prices, reports IRSG.

(Source;JETRO, January2010, except Sri Lanka)

Global NR latex production was 0.97 million tonnes in 2010, 5 percent lower than the previous year. Malaysian, Thai and Indian production dropped by 15 percent, 6 percent and 1 percent respectively while Chinese production was flat in 2010 compared to the previous year.

The growth in NR latex exports was down 8 percent in 2010 to 0.66 million tonnes, while net imports were down by 4 percent. Significant players in the global NR latex industry, is of late facing unprecedented challenges at a time when the demand for latex-based products is on the rise across the globe, whether be it for gloves, condoms, catheters or a host of other products like toy balloons and rubber bands.

A major challenge facing the latex consuming industry at present is the acute shortage of latex concentrate, which is directly linked to the NR prices.

Tyre Industry

It is known that NR constitutes as much as 50 percent of the cost of tire production. The NR price increased over 240 percent from the February 2009.

Extreme weather and aging trees in the key rubber-growing countries of southeastern Asia are expected to reduce NR production to 10.25 million metric tons this year. Meanwhile, NR consumption is expected to be around 10.31 million metric tons.

Looking ahead, projected demand of 11.26 million metric tons in 2011 will outpace anticipated production of 11.0 million metric tons.

The bullish NR demand and price outlook is supported by the fact that inventories of the material, used to make gloves, hose, gaskets, and condoms as well as motor vehicle tires, are projected to fall to 67 days of demand in 2011, according to economic analyses.

That’s because of a projected 16.4 percent rise in world automotive production this year, according to IHS Global Insight, and an 8.5 percent expansion in 2011.

Since this ‘bullish-phase’ in the NR will continue to lag behind soaring demand for some months to come, tyre makers have had to boost prices to offset the higher cost of their key raw material.

Global tyre demand exceeding supply

Global tyre demand is expanding at a faster pace than production, led by growth in China, as vehicle sales are increasing, according to Sumitomo Rubber Industries Ltd. Tyre sales in China, the world’s largest auto market, may increase 30 percent this year or at 10 times the global rate. Sumitomo Rubber, the largest Japanese tyre maker after Bridgestone Corp., said sales will increase 3.1 percent to 93.7 million tyres this year.

Rubber prices climbed 38 percent in the past year and reached a record in February after auto sales in China surged 32 percent in 2010 to an all-time high, surpassing the U.S. market for a second year.

Increasing costs spurred tyre makers from Bridgestone to Akron, Ohio-based Goodyear Tire & Rubber Co. to raise prices.

Commodities beat stocks, bonds and the dollar for five straight months through April, prompting central banks from Beijing to Brasilia to raise interest rates to cool inflation.

“Tyre supply and demand is tight globally and particularly in North America,” says Goldman Sachs Group Inc. Analysts say “In contrast to many makers that retrenched due to the financial crisis, Bridgestone and Sumitomo Rubber increased capacity and are benefitting from growth in demand amid a global supply shortage,”.

Bridgestone shares advanced 24 percent in the past year and traded at 1,825 yen in Tokyo on May 27, while Sumitomo Rubber shares increased 15 percent to 923 yen.

China sales

While auto sales in China reached a record 18 million last year, they slowed in 2011 as the nation increased retail gasoline and diesel prices and tightened monetary policy to cool the fastest inflation since 2008.

The government increased interest rates and raised bank reserve-ratio requirements to curb price gains that have exceeded the government’s four percent target every month this year. Demand for replacement tyres is growing in China as car ownership expands.

Sumitomo Rubber, which controls about 6 percent of the global tyre market, said it can process 46,000 tons of rubber a month this year, up 3.5 percent from last year. The Kobe-based company said that it is building a plant in Brazil that will have a capacity of 2,200 tons a month by 2013 and is also expanding production capacity in Thailand and China.

“Our production capacity is not large enough to meet expanding demand. The shortage may worsen as global consumption is expected to grow by 3 percent annually in coming years,” they say.

Tyre demand

Global sales of passenger-car tyres are forecast to grow 6.1 percent this year from 2010, while sales of commercial- vehicle tyres are forecast to rise 11 percent, according to IRSG forecast.

Tyre price hikes

Due to increasing raw material prices, Michelin North America Inc. is increasing prices by an average of 12 percent on Michelin and BFGoodrich brand replacement commercial truck tyres. The price increase also includes Michelin Retread Technologies retreads sold in the United States. The increase will go into effect July 1. This is the second price increase announced by Michelin this month (see Michelin) will raise prices in Canada. Michelin joins several other tyre manufacturers in raising prices due to raw material cost increases.

Consumer

Effective June 1, 2011, Toyo Tire U.S.A. Corp. was expected to increase the dealer base price on passenger car and light truck tyres up to an average of 8 percent. Falken Tire Corp. will increase prices up to 8 percent on its consumer tyres effective July 1.

Commercial

Double Coin Holdings Ltd. will raise prices up to 6 percent, effective June 1, on all Double Coin produced radial truck, OTR, crane and industrial tires. That includes associate and private brand radial truck tyres. Falken Tire Corp. was expected to raise commercial truck tire prices by up to 10 percent effective June 1. Hankook Tire America Corp. was also expected to raise prices on its commercial tyres, including Hankook and Aurora, effective June 1. The increases will be up to 9 percent.

Canada

Yokohama Tyre (Canada) Inc. raised prices on its consumer tyres on May 1, 2011. According to the company, all pricing on unfilled orders placed before May 1 “will be re-calculated at the new prices.” The price increases vary by tyre category: High Performance, 5 percent; Light Truck, 4 percent; Passenger Touring, 4 percent; winter, 4 percent. Michelin North America (Canada) Inc. was expected to raise consumer tyre prices up to 10 percent effective June 1, 2011.

Shift in location

It had been reported that the dominance of Akron, Ohio, USA in the tyre business in the first three quarters of 20th century was on the decline and business activity is now shifting to China with a prediction that, by the end of the decade, as much as 80 percent of world tyre production would come from there. China attracted most multinationals by offering them everything they looked for- cheap labour, good quality, necessary infrastructure and the like.

However, things, as expected, are taking a bad turn of late. China’s advantages are on the decline. The supply of low -cost labour from interior parts of the country is declining. At present, Vietnam appears to be very attractive for future plant location (please see chart 2 ).

In Sri Lanka, plantation sector worker wage is in the region of Rs 10,125 (Rs 405 x 25), equivalent to US$ 92.89 (1 US$= Rs 109). This appears to be comparable to that in Da Nang city in Vietnam.

Tyre manufacturing even in China is much more dispersed. This is a feature of all mature industries so the likelihood is that we will not see Akron’s like again, even in the new China or other developing countries in the Asian region.

Colombo Auctions

NR prices at the Colombo Auctions have been fluctuating, since the first week of January, with the historical high of Rs 700 for LC1X grade on 15/02/2011. The highest price ever recorded for RSS3, the main grade used in tyre manufacture, had been Rs 730 in the same month. The monthly average price movements in 2011 as indicated in chart 3, shows that NR prices are moving around Rs 500 to 600 for the three grades indicated.

Formulating new flexible marketing strategy and to respond accurately to the changes of the markets should be the medium to long-term concern of both producers and consumers.

Sri Lanka’s Dipped Products for example says gains from its plantations helped compensate narrower margins in its rubber gloves manufacturing business, due to rising NR prices.

In any case, NR prices at the Colombo Auctions are expected to stabilize around Rs 450 to 500 for LC1X, Rs 400 to 450 for RSS1 and Rs 450 to 500 for RSS3 even after NR supply eases and despite the adverse fallouts of climate change, high costs of inputs like labour, shortage of tappers, non-availability of cultivable land etc.

Branding of NR

A brand is a powerful tool in your hands, a visual image that encapsulates a perceived value associated with our country’s product or service by customers and potential customers. As competition intensifies, business should realize the power of branding as an alluring marketing and sales tool.

In order to create a brand image to the Indian NR, a logo has been developed and made available to the public. NR exporters who join the branding scheme are permitted to use the LOGO of the Rubber Board on all their produce that conform to the relevant standards.

As this logo carries the quality assurance by the Rubber Board, it commands a strong brand call. It symbolizes a seal of trust on the quality of natural rubber produced and export from India. Can something similar to this be evolved for our Sri Lankan Crepe which is a unique grade? The “Latex Crepe IX”, used by the pharmaceutical, medical and food ancillary industries has its uniqueness.

The uniqueness of Sri Lanka’s rubber is its whiteness, which cannot be matched by any other country. This seems to be a clonal, environmental and processing characteristic.

Sri Lanka ventured overseas with its first attempt at branded rubber - “Lankaprene”, a premium quality crepe product. The low protein product was positioned as an alternative to synthetic options that is petroleum based and so priced higher. Sri Lanka is the only producer of crepe rubber in the world. Lankaprene was expected to be used for mostly medical applications and sports goods. Lankaprene was launched in the United States on a trial basis in April 2004. Since then consignments have been delivered at 25 percent above regular latex crepe prices, and producers were gearing up to deliver higher volumes, but its progress now seems to be unknown even to the Sri Lankan NR industry. A lot has been said about “Ceylon Tea”; why not we do branding of an equally unique product, “Ceylon Crepe”, the traditional Ceylon rubber.