Natural Rubber risks drive strategic realignments

Here in Guatemala, the fantastic Rubber days meeting has just finished. Measured by volumes, Guatemala is barely even on the map of Natural Rubber (NR) producing nations. But measured by creativity and energy it is up there among the leaders.

Guatemala has the first (and I think only) FSC-accredited rubber plantation anywhere in the world. Plantation owners and managers here are exploring ways to add value by listening to the customers and delivering what they want.

Guatemalan creativity

Just one small example: tree lace is the dirty streak of old rubber that clings to the tree after the latex has dripped into the collection cup. It’s undesirable, and when the tree lace is mixed with pure latex, it degrades the quality of the latex.

A plantation manager can educate, lecture, punish, or otherwise provide incentives to stop collectors adding the tree lace, but frankly, it doesn’t work.

So what do the Guatemalans do? They pretend the tree lace is desirable, and pay extra for the dirty strips of contaminated rubber.

Counter-intuitive? Of course. The weight of tree lace is tiny, so the extra payment for the undesireable material is small, but the improvement in quality of the latex, and hence the value to the customers, is worth much more.

NR-producing countries can learn lessons

Instead of moaning about low prices of rubber, larger governments should be thinking about how they can meet the needs of their customers. Like the Guatemalan producers do.

I chaired a panel on the future of NR at the meeting and afterwards one of the audience suggested that I was a Natural Rubber guy. I don’t really think of myself that way, but if that is the impression I give, I’m more than OK with it.

So to prove my ‘NR guy’ credentials – or otherwise – I offer the following ideas.

Long term outlook for NR

NR is in oversupply. My good friend Hidde Smit presented his projections for the next 20 years. If you are a rubber grower, it is not good news. Prices are unlikely to rise above $1.50/kg or so for the next 10-12 years, and may well spend a lot of that time in the $1.20 range or even lower.

Personally, I think we’ll see the price fall below $1 pretty soon, and remain there for a good few years.

Eventually, the supply/demand balance will change to under-supply, but according to Hidde,that is unlikely to kick in before around 2025, and may well be as late as 2030.

Rubber shortage will kick in ... eventually

When it does kick in, however, the shortage will be severe and result in substantially higher prices.

That’s the analysis coming out of the top economic models, and in my opinion, Hidde is by far the best analyst in the world studying rubber prices today.

I’m not going to argue with him on the fundamentals of area, yields, over-tapping, or indeed on the numbers for truck and car tires and how those will change around the world over the next few decades.

Foresight affects projections

I’m going to argue with him about the impact his predictions are having on tire makers.

Over the last decade, large corporate companies have taken to analyzing the sustainability of their business models, and identifying risks to those models.

It’s not only the International tire majors who are on to this. In IPO documents from Chinese tire makers, there is often a section on business risks. Those documents identify NR pricing as the biggest risk to the investment value of buying shares in Chinese tire makers.

Business risks associated with natural rubber

Let me summarise the risks in layman’s terms.

All the world’s NR comes from a single species – hevea Brasiliensis. Well over 90% of the world’s production of NR comes from the limited geographic region of South-East Asia. There are climate, political and species risks associated with those two facts.

Guatemala is one of the few locations in South- and Central America where the climate does not favour a disease called South American Leaf Blight (SALB). That is what destroyed the rubber plantations set up by Henry Ford and Harvey Firestone in the 1920s. Those who know the story of Fordlandia will attest to this.

SALB is not the only disease to affect rubber trees. There is white root disease, now endemic in much of Africa and some parts of SE Asia. The worst of them is Corynespora Leaf Fall.

I won’t go into the details – you can read about them in my report ‘Sustainability in the Tire Industry’

The point is that if any one of these diseases became established in Thailand or Indonesia, the world’s supply of NR would quickly fall. If it spread to Vietnam and Malaysia, that could be disastrous.

Climate change

Another major risk is climate change. We are discovering that hevea is relatively sensitive to climate, especially as we plant trees in marginal areas such as Vietnam, Cambodia, Yunnan Province and even northern Thailand.

As global temperature continue to rise, El Nino events become more powerful and more common, leading to drought or flooding in rubber-growing areas. Typhoons and other storms are causing more and more damage to trees as the oceans warm.

There are other risks associated with this single species grown in one small area of the world. These include political instability; logistics issues and others.

For a major tire maker, these are big risks. They cannot be managed by tire makers.

Risks are too big to ignore

Each truck tire consumes around 20 kg of NR. In the carcass, NR is used almost exclusively to coat steelcords.

Today availability of NR is critical to the economic success of the truck tire business around the world.

A significant event which restricts availability of NR is not an extinction-level event for truck tire makers. Not quite. There is no question that truck tire makers would be severely disrupted if prices went up significantly, or if availability were to be restricted for any reason.

In the last decade all the top tire makers have made main board-level decisions to seek ways to manage the risks associated with NR.

Strategies to manage NR risks

Since those decisions were made, we have seen some key strategies emerging from the tire makers which will – they hope – result in a portfolio of solutions to a potential future shortage of NR.

• Development of Guayule and TKS as alternatives to Hevea rubber
• Development of synthetic polyisoprene processes
• Development of truck treads using advanced synthetic rubber materials.
• Developing a circular economy based on re-using old tires in new ones

The hope is that when – not ‘if’ – when the NR crisis hits, most of the big-brand tire makers will have a range of solutions that can be brought in to help them ride the storm.

Tire development incorporates these strategies

I’ve spoken to all the top tire makers and they confirm privately that these decisions are now embedded in their tire development programs.

So while I have great faith in Hidde Smit’s economic model, I think the price spike he predicts in the late 2020’s may be less sharp than his models suggest.

Foresight is a great thing. If I am aware of these predictions, there is no doubt that many tire makers – especially the top ones –  have seen the crisis coming.

Their hope is that they can be prepared when the crisis hits.

Preparedness means success when the crisis hits

When it does hit, those who are not prepared will be struggling to get hold of NR and the prices will kill their profitability.

I’m not sure I can see 20 years ahead in any industry, but this looks to me like another case where the premium, established manufacturers can build on their advantage over newcomers to the tire industry.

For more on sustainability strategies in the global tire industry, see our report on Sustainability in the Tire Industry