Spend Matters welcomes this guest post by Monika Sosnowska of Mintec.
Vehicle tires might look quite simple from the outside, but in fact, their composition is complex, involving many raw materials. However, the most abundant material used in tires production is rubber.
In recent years, rubber prices have been declining across the world due to an oversupplied market and weakening demand. The prices fell between 50% and 70% from the peak in February 2011 and are currently down over 10% since the beginning of the year.
The tire industry is the primary market for rubber, whether it’s natural or synthetic rubber. Rubber is also used to make many other products including latex gloves, footwear and chewing gum. Over 40% of world rubber is produced naturally in the form of latex, while the remainder is synthesized from crude oil derivatives, such a styrene and butadiene.
The downward trend of prices seen in recent years is due to an oversupplied global market. Last year there was a global surplus of 736,000 tonnes of natural rubber and 65,000 tonnes of synthetic. Natural rubber is harvested from plantations of rubber trees. If there is a high demand for rubber, producers are encouraged to plant additional trees, but as new trees take 6-7 years to reach maturity, any increase in planting does not immediately affect the supply of rubber to the market. Once matured, the trees can remain productive for up to 25 years. This makes the control of supply versus demand much harder to balance.
In addition to the high stocks, weakness in the manufacturing sector in China is also severely affecting rubber prices. China is the biggest importer and consumer of rubber, and its PMI (Purchasing Managers’ Index), a good indicator of the strength of the sector, dropped to 49.5 in December, a 7-month low.
Moreover, the situation might worsen with the recent announcement that the US is imposing duties on imports of Chinese tires. This is a second time duties have been introduced. The previous initiative was from 2009 to 2012. This announcement follows record high imports of 46m Chinese tire units in 2013 into the US, up 56% y-o-y.
The reason behind imposing duties is that tire manufacturers are highly subsidized in China (some even over 80%), giving Chinese sellers a huge advantage over sellers in the US market. The higher duties will result in less demand for Chinese tires and therefore Chinese rubber. Chinese tire producers would have to redirect the flow of their tires into other markets and find new buyers … again.