(March 2010)

When a market such as the Auto Industry in the US, traditionally a heavy consumer of rubber, is only just getting off its knees after a severe blow, it is perhaps a little strange to see continued announcements from tire manufacturers around the globe about tire price increases.

Clearly, OTR Tire demand has not yet bounced back to previous levels of a few years back and the price of oil hasn’t returned to record highs (a key ingredient in the tire manufacturing process), so what are the other factors driving the new cycle of spiraling cost increases?  Could it just be wishful thinking to try and jolt some demand back into the market in the early part of a new year?

In the OTR tire industry, the most recent price increases have largely been influenced by the steadily accelerating increase in the price of natural rubber (NR).  Nearly all tires contain NR, but the difference between the percentage of NR a car tire uses and the quantity that is needed in the manufacturing of an OTR tire is clearly, significantly larger.

So too, is the difference between the quantity of NR used in the manufacturing process compared to synthetic ingredients such as synthetic rubbers (SBR), carbon black, nylon steel  and other natural ingredients such as oil and silica – commonly known as sand.  OTR and Commercial tires use a much larger percentage of NR because of the physical properties of rubber and principally because of the heat dissipation characteristics.  These advantages of NR have yet to be bettered by any viable synthetic rubbers.  Therefore, OTR Tires and Commercial tires are far more susceptible to the vagaries of crop production and future yield predictions.

The rubber growing market is complex and there is a trend to turn over land from rubber production to other, higher yielding, faster cash-producing crops such as palm oil, thus the result is reduced production and low seasonal stock.

New trees are being planted, but  take up to 8 years of nurturing before providing the first crop and even longer to get to full production, so downturns in rubber production take a long time to correct.

And that’s about where the market is now.

Whilst there does not seem to be any significant danger of a rubber shortage, the market is now moving to a level more closely aligned to supply  and demand with increased prices in the end product, the result.

NR Prices on the Malaysian rubber exchange are now (mid March 2010) double what they were a year ago, and with stocks depleted and hedged price contracts now expiring, manufacturers are forced to buy raw materials at the new, higher prices. Since the market is US$ denominated, even any recovery in a strengthened US currency is unlikely to offer any cushion.

So, even in a market that has yet to see a big volume recovery since the economic downturn of the last years, like it or not, tire prices will continue to rise as a result. Maybe not the best news for industries already stretched on profitability, but nevertheless, one to factor into the business for the second half of 2010 and 2011.