Steady demand bumps up rubber prices

By By Christopher Reilly -- Purchasing, 8/10/2000

Steady demand for rubber products from the automotive industry and other end uses, such as industrial mechanical parts, are keeping most rubber materials prices strong.

This, accompanied by continued strength of the U.S. economy and high energy costs, has prompted rubber producers to call for price hikes.

The most recent of these price increases includes a 4¢/lb to 5¢/lb price hike for emulsion SBR and polybutadiene rubber products. These increases, proposed by Goodyear Chemical, Akron, Ohio; Ameripol Synpol Corp., Port Neches, Texas; and DSM Corp., with corporate offices based in The Netherlands, were effective in July. Also, Goodyear has raised its polyisoprene prices by 10¢/lb in the U.S., effective in July.

"Compared to this time last year, we estimate that most rubber prices have increased by as much as 10%-15%," says Tim Brown, vice president of sales and marketing at Ames Industrial Rubber and Manufacturing based in Hamburg, N.J. Brown attributes this upward price movement to higher raw material costs, constant demand and very tough competition.

With demand steady for the raw materials used in rubber production, and with continued change in the product mix (especially toward longer-lasting tires with higher performance attributes), rubber buyers could see some moderate upward pressure on prices in the year ahead.

Price picture

Rubber pricing can vary greatly among the many different rubber grades and products. But in general, pricing for most rubber products track natural rubber pricing.

The world's largest exporter of natural rubber is Malaysia, which, by some estimates, accounts for about 80% of the global rubber supply. According to data compiled from the Malaysian Rubber Board, based in Kuala Lumpur, natural rubber prices have risen steadily since last year. Pricing for ribbed smoked sheet rubber was about 55¢/kg this time last year. But in the next few months prices increased steadily. By September 1999, natural rubber pricing was about 64¢/kg.

Later in the fourth quarter, buying activity slowed. This may have been associated with year-end Y2K concerns or simply large buyer inventories. Prices softened slightly in December 1999, and this softening carried over into early January. By midmonth, Malaysian ribbed smoked rubber prices were in the low-60¢/kg range.

Rising energy costs during the first quarter of 2000-caused by higher crude oil prices based on Organization of Petroleum Exporting Countries (opec) announcements-resulted in increases for Malaysian rubber pricing. By April, ribbed smoked natural rubber pricing was about 71¢/kg. In the past few months, however, prices have come back down to the mid-60¢/kg range and market activity has been fairly quiet, according to the Malaysian Rubber Board.

Natural rubber is often mixed with styrene-butadiene rubber (SBR) and butadiene rubber (BR), which are two of the more common synthetic rubber products. Also, SBR and BR can often be substituted for natural rubber (and vice versa) in other rubber compounds production. According to one market analyst, the decision to do this is entirely based on price. "If natural rubber prices are low, producers tend to use more of it in the rubber compound," he says.

Another raw material that may be used as a price trend indicator for rubber grades is carbon black. According to buyers who responded to Purchasing's monthly survey of chemical transaction prices, carbon black prices are set to increase in the near future.

Carbon black contract and spot pricing had been steady for most of last year. Contracts averaged about 33¢/lb and spot market pricing averaged about 39¢/lb in second quarter 1999, and these prices remained steady through the first quarter of this year.

Buyers predict third-quarter prices to increase by about 3¢/lb to 4¢/lb, up to about 40¢/lb for contracts and about 42¢/lb on the spot market. These prices will likely continue to firm by the end of the year as well. Buyers estimate fourth-quarter prices to average 41¢/lb for contracts and about 44¢/lb for spot tags. Look for contracts and spot prices to flatten in the first and second quarters of next year, though contracts could see some additional upward movement of about a penny/lb.

Demand chugs along

Analysts and suppliers see steady but moderate growth in rubber product markets for the next several years.

"We're anticipating growth of the North American rubber market demand at about 2%/yr," says Guy Deswert, a market researcher at Bayer Corp's rubber business, located in Akron, Ohio. "But, in lieu of higher production levels so far this year, demand growth could be slightly higher this year than originally expected (around 2.2% to 2.5%)," he says.

Demand estimates from the Rubber Manufacturers Association (RMA), located in Washington, D.C., predict that synthetic rubber will see continued moderate growth in 2000. Overall, tire elastomers will grow at about 2% annually through 2004. The largest gains in this sector will be seen in styrene-butadiene rubber (SBR) solution material, which should grow at an annual rate of 5% through 2004. Butyl and polyisoprene rubber will grow at 2.5%/yr for the same time period. Other rubber grades showing growth will include SBR solid (2.1% annual growth) and emulsion SBR (about 0.8% growth).

Global demand for rubber processing chemicals is forecast to increase at an annual rate of 3.6% through 2001, according to a report from Cleveland, Ohio-based industrial market research firm The Freedonia Group.

For carbon black, demand is forecast to increase about 3% annually to about 7.8 million tonnes by 2001, according to Freedonia. More than 90% of demand for carbon black is as a reinforcement in vulcanized rubber goods, and about 68% of that demand is used in automobile tires. Carbon black will benefit from the trend toward higher-performance tires, because more material is used in the development of performance tire treads. These tires also have shorter service lives and must be replaced more often.

Non-tire market carbon black demand is linked primarily to products such as hoses, belts and other mechanical goods. Prospects for these products are good, but competition from thermoplastic elastomers-which have exhibited strong market growth-could reduce growth estimates for carbon black in the area of mechanical parts. Thermoplastic elastomers require little, if any, carbon black in their formulation.

Other factors

The rubber market is made up of a family of more than 50 types of synthetic products. The primary market for rubber is in automotive tires. Other markets include mechanical automotive parts, such as timing belts, hoses, padding, engine components and other parts.

While market trends that affect one market segment for rubber products do not necessarily affect all areas, some common trends have emerged.

One trend is toward improvements in the performance and service life of rubber products. In the highly competitive market for automotive tires, suppliers continue to extend warranties for the tires they sell. This is done mainly to strengthen consumer brand identification, according to Freedonia.

In addition, extended warranties on new automobiles and the increased popularity of lease agreements have raised performance standards on tires. As a result, the rubber market has seen improved demand for antidegradants, which are designed to improve the effects of oxygenation, ozone, heat, sunlight and mechanical wear and tear on rubber products. Antidegradants are forecast to see 3.8%/yr growth to 386,000 tonnes by 2001, according to Freedonia.

"The introduction of radial tires and front-wheel-drive automobiles has lengthened the service life of most types of tires and affected rubber consumption," says Bayer's Guy Deswert. "Also, in the past five years, we have seen the advent of more sport-utility vehicles," he says. "These vehicles tend to use larger tires and wear them out quicker than other types of automobiles, thus increasing demand for replacement tires."

About 30% of tires manufactured go into original equipment for new automobiles. The remaining 70% of tires go into the market for replacement tires.

In terms of supply, most sources indicate no problem sourcing material. Leadtimes for most rubber products are currently about half as long as last year's levels. According to Purchasing's leadtimes survey, leadtimes for rubber hose averaged about 1.6 weeks in July. This is slightly longer than the June average for rubber hose (1.4 weeks), but it is considerably shorter than July 1999, when leadtimes averaged 2.4 weeks.

Leadtimes for V-belts show a similar trend. The average leadtimes for V-belts in July was 1.6 weeks. Compare this to June's data (1.1 weeks on average) and July of 1999, when buyers estimated leadtimes to be 2.4 weeks.

For replacement tires, leadtimes show different activity. In July, leadtimes averaged 1.5 weeks, which is up 0.4 points compared to June. In July of last year, leadtimes for replacement tires averaged 1.2 weeks, according to buyers' data.

Major players in the domestic rubber market include, Exxon, based in Houston, Texas; Bayer's rubber business, in Akron, Ohio; Uniroyal, a subsidiary of Crompton & Knowles, based in Greenwich, Conn.; American Synthetic Rubber Corp., in Louisville, Ky.; Goodyear Tire & Rubber Co., in Akron, Ohio; and Bridgestone-Firestone, located in Noblesville, Ind.

In supply news, Cooper Tire & Rubber Co., based in Findlay, Ohio, has announced plans to sell its Holm Industries Inc. plastics business, the largest business unit in the company's plastics division. Terms of the agreement were not disclosed.

Also, Cabot Brasil, a subsidiary of Cabot Corp., will build a $30 million carbon black production unit at its Maua, Brazil, plant. The unit, which is expected to be completed by early 2002, will bring about 40,000 tonnes of carbon black capacity to the market.