Every quarter we analyse pricing in the rubber raw materials markets, identifying trends and the patterns that point towards where prices might go in the next few months. This quarter global trade and supply chains have been impacted by the Covid-19 pandemic, creating uncertainty and pricing volatility.
Raw materials prices fall in wake of pandemic
Our last quarterly overview of the rubber raw materials markets was in the middle of February. We identified the new coronavirus as a potential global issue and described the situation as the calm before the storm. Since then the Covid-19 pandemic has hit the industry in a big way. The oil price has been extremely volatile over the past few months. That has affected prices for all polymers as well as carbon black. Meanwhile, the pandemic brought its own challenges and opportunities. Manufacturers across the world have raced to develop a new generation of artificial breathing machines and many – including those in the food and beverage sectors – have amended their outputs to include disinfectants and hand sanitisers.
The pandemic has caused huge changes to the way that the world lives and works, from government-mandated factory shutdowns to stay-at-home orders. The virus containment measures have slashed demand for personal transport and global travel, impacting the automotive and aerospace markets. Some sources suggest that by the middle of June, demand from automotive industry was down by around 75% on more normal levels of demand. However this includes a distortion effect caused by inventory effects and de-stocking following a surplus of components manufactured in March and April. The European Automobile Manufacturers’ Association (ACEA) has forecast 2020 passenger car registrations to fall by about 25% year-on-year. The aviation sector has been the worst hit, with many of the normal routes of demand practically shut off. General industrial demand for rubber goods is down by 40% to 50%. Although again, inventory effects have distorted the numbers.
At the same time, the medical sector has seen an increase in demand for nitrile and latex gloves, breathing tubes and other products with polymer-based components. While many chemical plants have been shut, maintenance teams have been carrying out repairs and upgrades, which has sustained demand for components like washers and seals. Many industries, including as aerospace, have also shown great flexibility in adapting to new markets and approaches. This has ranged from trials to prove the feasibility of using drones to deliver personal protective equipment, to consortia collaborating on ventilator development.
Demand for rubber goods from the building sector fell rapidly in the weeks after the lockdown, but is now recovering fairly well as more supply outlets are allowed to re-open and building sites gradually return to work. Agriculture has remained largely unaffected.
Compromised supply chains and inventory build
Factory shutdowns in the automotive industry have been seen throughout the world. Although many of the larger suppliers are currently able to absorb the loss in sales, smaller OEMs down the supply chain are struggling and many are using legal remedies as a last resort to enforce contracts and prevent business from collapsing.
Manufacturers of products such as oil hoses, door seals, wiper blades and timing belts, among others, have continued production, despite significant reductions in orders. The continued production of such goods, while car production has virtually stopped, means that there has been a huge build-up of inventory across different tiers of the supply chain. A key aspect of this is that when companies were ordering materials, they did not expect to see a rapid downturn, so they bought supplies forward, and locked in raw materials prices at levels that would make it possible to make a margin when the goods were sold at agreed prices.
In the meantime, spot prices have fallen sharply across almost all materials. Because of the supply-chain effect, many of those goods were not sold, or materials were not consumed. This means companies are sitting on components and feedstocks bought at high prices, and are reluctant to sell the goods made from those expensive materials at prices that reflect current spot prices of the raw materials. This means reductions in raw materials prices are not being passed onwards up the supply chain.
Furthermore, car sales around the world have fallen and show little sign of a strong recovery. High inventory levels will further reduce orders for new components – and therefore raw materials – at least until September, and possibly out to the last quarter of the year.
Demand for butadiene and SBR dropped within a few days of the car factories being closed. Volumes have recently started to recover as car makers begin the long road back to normality. On the other hand, demand for elastomers used in the non-tyre sector, such as EPDM, NBR and polychloroprene took some weeks – or even a couple of months – to feel the effects of the crisis. These currently look set to see substantially reduced volumes throughout Q3 and probably into Q4.
One of the key aspects of the Covid-19 crisis is that buyers and sellers have drastically upgraded the frequency of their communications. During the worst periods, there were calls every day to assess order volumes, prices and contract arrangements. This reflected a sense across the industry that companies are in this together, and will have to continue working together when the crisis eases. The pandemic was not brought about by any of the parties involved, and all have worked hard to resolve the many issues.
Of course the negotiations have been tough, but in the end, the prevailing view is that all sides have tried to be fair, in the knowledge that this is a temporary crisis and suppliers and customers can best help each other by sharing information about demand patterns, availability and pricing more often than has been the case in the past.
Although national lockdowns have impacted trade throughout the world, the effect of lockdown in India has been particularly acute. During the severe lockdowns in the subcontinent, there was no possibility of getting goods or payments either in or out of the country. Although the effect was temporary, this has weakened global confidence towards some businesses in India, and may affect future exports of rubber from the country.
Prices have fallen from around $1.40/kg pre-crisis, to $1.10 or so in May. According to a webinar on the state of the natural rubber (NR) industry held in June, prices will remain weak for the rest of the year, and could fall further, to around $1.00 by the end of the year.
Different forecasters are giving different estimates for the decline on consumption of NR in 2020. The most positive is the Association of Natural Rubber Producing Countries (ANRPC), which is suggesting that global NR volumes will fall by just 6% in 2020, compared with 2019, although this may be a bit too optimistic.
IRSG reported that demand for NR was down by 18% in Q1 (YoY), while demand for synthetic rubber was down by 8.4% in Q1 (YoY). China is the largest consumer of NR around the world, so the large decline in Q1 reflects the shut down of much of China’s tyre making industry in that period. In an update published in late May, the group projects total rubber demand to be down by just under 10% in 2020, at 25.9 million tonnes. That is split as a 7.4% decline in NR and a 12.1% decline in synthetic rubber
Hidde Smit, from RubberForecasts.com predicts demand for rubber used in tyres will be down nearly 12% in 2020, with synthetic rubber hit harder (-13%) than natural rubber (-10.7%), due to the relative resilience of the truck tyre sector, which tends to use more NR than SR.
All of these forecasts seem to be overly optimistic. Our sources suggest that tyre demand in 2020 will be between 20% and 15% below the demand levels of 2019. Since tyres consume around 80% of all NR, it seems likely that the decline in NR use will be of the same scale, even though the decline in tyre consumption has been offset to some extent by increased demand for latex for use in medical gloves and other equipment.
Prices of carbon black also plunged as demand from the tyre industry dried up from March onwards, but have since recovered some of those losses on a recovery in the oil price.
At the minimum, in April and May, prices were down by around one third on the price early in the year. At the time, oil feedstocks were priced around USD20/barrel. Since then, the oil price has recovered to around USD40/barrel, and carbon black prices have also recovered by single-digit percentage points, so that prices are now around 25% to 30% below the prices seen at the start of the year. The carbon black industry is now confident it has seen the bottom of the crisis and things will only improve during the rest of the year.
One of the peculiarities of the carbon black price is that most tyre makers, and some large consumers in the general rubber goods industry, have negotiated pricing formulas that put the risk of feedstock prices onto the buyer. That is to say, if the oil price changes, that is passed through to the customer. Historically, the price for July was set on 1 June. However, during this crisis, some of the carbon black producers have said they were unable to pass on all the reductions in feedstock prices. Others have delayed the date for setting prices from the first of the month to the middle of the month. There has also been a feeling among some buyers that suppliers were trying to see what they could get away with.
Some buyers felt that there was no generosity when carbon black was so short a couple of years ago, so they would not be generous about waiving contract clauses during these times. However, they also recognised that their negotiating power was limited by the fact that their volume requirement was lower than historically.
The volume reductions in rubber chemicals and additives coming out of China that we forecast in our last report appeared, as expected in late March. Because demand for tyres and other automotive products was falling rapidly at that time, there has been no significant effect on the industry.
As with other chemicals, there is currently no problem with availability. The only issue is price.
Chemicals such as TMQ (anti-oxidant) and some peroxide curing agents use acetone as a feedstock. Prices of acetone have rocketed, because it is used as a feedstock for hand sanitising gels. Those are in heavy demand, meaning that factories that use acetone for other goods are finding it hard to source supplies, and when they can find a source, the price has jumped.
BR and SBR
As noted above, the decline in demand for BR was closely linked to the decline in demand for tyres. From a recent high of nearly USD1250/tonne in November 2019, the price of butadiene monomer fell to just below USD1000 in January, and as demand for tyre rubber dropped first in China and then in the rest of the world, prices fell through the floor, to around USD300/tonne.
Prices for butadiene monomer fell sharply, to the point where there was no margin over naphtha, despite producers requiring some USD100/tonne to convert naphtha into butadiene. The price of butadiene rubber dropped from USD1500/tonne in the first quarter to below USD1000 in Q2. Due to the sharp reduction in demand for butadiene rubber (most of which goes into tyres) butadiene producers tried to switch out of rubber and into ABS plastic to have any hope of making a profit on the material.
Along with oil, the price of ethylene and propylene monomers fell sharply in the March-April period, but have been recovering since. Overall, prices fell by about one third, and then recovered a little. Prices are expected to recover further as the year goes on, but will still be 10% – 20% below January 2020 prices by the year’s end.
Because EPDM is used mainly in building and automotive products, the supply chains have been steadily filling during the worst of the lockdowns in April and May. However, because of the healthy demand during those months, prices did not fall. Thus, the inventories are full with product made with high-priced materials.
Demand now is dropping and unlikely to recover before the end of Q3, and possibly into Q4. In 2018 and 2019, a lot of new capacity came into the market. As demand has dropped, many of the reactors have been idled. We believe there will be significant announcements of capacity reductions before the end of the year.
Arlanxeo said in November 2019 it will close the plant in Orange, Texas by Q2 2020. With the current overcapacity in the market and demand remaining low, we believe this will not be the last such announcement.
There are also anti-dumping investigations going on. China is studying alleged dumping of EPDM from various countries. China is looking to put a tariff of 103% on EPDM imported to China from the United States and 30% on material sourced from Europe and 25% on material sourced from Korea.
Although polychloroprene rubber (CR) has been in extremely short supply through most of 2019, there is now plenty of material on the market.
Most CR goes into automotive applications for products such as CV joint boots. With demand for auto components down by 75% or so, that means there is now plenty of CR material available.
Nitrile rubber (NBR) has also seen some activity in proposed tariff barriers. In late May, 2020, India started an investigation into alleged dumping of the material in Indian markets from China, Europe, Japan and Russia. The investigation was triggered after a complaint by M/s Apcotex Industries Ltd., which claims to be the sole producer of NBR in India.
The price of NBR is closely aligned to the price of butadiene monomer. At present, those prices are low because demand for butadiene rubber is limited due to slow demand for tyres. One NBR producer has forecast a 5 to 10% increase in butadiene prices over the next 12 months. So far this year the prices have fallen around 40-50%, so that is just a very small recovery.
Fluoro-elastomers (FKM and FFKM) are relatively expensive materials, often used to seal aggressive chemicals. Demand for these materials has remained resilient, as chemical factories, oil production environments and others carry out maintenance.
Nevertheless, one supplier based in Italy – where the virus first became established in Europe – has only been delivering limited volumes. Supply chain issues such as these have resulted in limiting supplies of the material to some parts of the world.
In association with David Shaw, Head of Research, Tyre Industry Research.