In early 2010, I predicted price increases on truck tires because of production issues regarding natural rubber, which traded at around $1.42/lb. at the time. About a year later, I wrote another column about weather impacting the price of natural rubber (NR)—and it hit an all-time high of $2.81/lb. just a short time later. Between 2010 and 2011, the price of natural rubber doubled; as a result, every company announced at least one price increase citing the rise in raw material and energy costs. I guess you could say I saw that one coming.
Fast forward to the present, rubber prices are down to $1.27/lb., and there haven’t been any runs on price increases like there were a few years back. Even an event like the Bangkok-based International Tripartite Rubber Council (which represents Thailand, Indonesia and Malaysia and is the OPEC of the rubber market with 70% of the world supply) announcing it would withhold supply and burn old rubber trees to boost prices in 2012 had no effect. At the time of the announcement about a year ago, the price of rubber was $1.27/lb., so nothing has really changed in that sense. A normal post-recession supply and demand cycle appears to be developing, which makes those in the tire industry happy.
According to several NR industry experts, the world should expect stable prices for natural rubber to continue over the next couple of years. Demand from China and India is still growing, but at a more predictable rate than years ago. With relatively flat demand from North America and a decrease in Europe, it looks like the surplus that has kept prices down over the past year or two will actually continue at the global level through the end of 2014. If those experts are right, then any price increases on tires in the near future will have to be attributed to something other than the cost of natural rubber.
But it isn’t time to pop the cork on the champagne yet. We have to remember that natural rubber is still an agricultural product and subject to all the variables regarding weather and disease. If there’s too much or too little rain in Southeast Asia and production slows down, the global supply takes a huge hit. And like any living plant or animal, rubber trees are always at risk of contracting a disease. When you’re talking about a plant that requires six or seven years of care and maintenance before the first ounce of sap can be collected, any widespread issues regarding the health of the trees themselves could trigger another spike similar to that which occurred in 2011.
Tire companies are spending millions of dollars to look for alternatives to NR, but they are probably decades away from making a significant impact on the demand for natural rubber. It has been a key raw material in manufacturing since the tire was invented—and I don’t expect that to change in my lifetime. No matter how you look at it, the global tire industry is still dependent on farmers in Thailand, Indonesia and Malaysia. Unlike their counterparts in the Middle East, however, they have no control over the environmental factors that ultimately dictate the level of production.
Years ago, I studied Chaos Theory in graduate school and was amazed by the delicate balance in nature. It’s difficult to imagine a butterfly in Brazil setting off a tornado in Texas, but a quick look at natural rubber prices over the past few years definitely provides some perspective. The scary part is that if the massive NR butterfly flaps its wings and sets off another “tornado” like the one from 2010 to 2011, nobody will see it coming.
