Rubber scarcity hits beleaguered carmakers

Vehicle makers struggling with pandemic-induced plant shutdowns and a global chip shortage are now confronting another supply chain headache: dwindling rubber supplies.

Snarled shipping lines are disrupting the movement of natural rubber, a key material used in tyres as well as components under the hood. With the global supply already running short after stockpiling by China and a devastating leaf disease, rubber prices are on the rise and some US automotive suppliers are rushing to secure shipments before the market gets squeezed further.

As companies in virtually every market grapple with shortages, perhaps no industry is being hit harder than automotives. Multiple plants have been idled by a semiconductor crisis that is costing tens of billions of dollars in lost revenue, while materials such as seating foam, metal and plastic resin are also becoming harder to find. The industry, which has long relied on just-in-time manufacturing to reduce costs, is finding it has limited flexibility to deal with supply chain disturbances wrought by the pandemic.

The rubber shortage threatens to further disrupt vehicle production just as demand rebounds and the Biden administration douses the US economy with $1.9-trillion in stimulus spending. And rubber problems could prove particularly thorny because the trees need seven years to mature, making it unlikely the supply will quickly bounce back.

“It’s like paper towels early on during the Covid crisis,” said Steve Wybo, who heads the automotive practice group at consulting firm Conway MacKenzie outside Detroit. “If you can get your hands on some plastic or some rubber, you’re going to order more than you need because you don’t know when you’re going to be able to get it next.”

Carmakers including Ford Motor and Stellantis, formerly known as Fiat Chrysler, say they are monitoring the rubber situation but have yet to feel an impact. General Motors, similarly, says it is not worried about its rubber supply. France’s Michelin, one of the world’s largest tyre makers, is skirting port congestion by using air freight shipments direct from Asia.

US distribution

But for suppliers reliant on US distribution, rubber is already a concern.

“I’ve got everybody alerted that I’ll take materials as fast as they can get it to me,” said Gary Busch, director of global procurement at Carlstar Group, which makes tyres for off-road and agriculture vehicles.

Natural rubber is produced from the white sap of trees found in the warm, humid climates of countries such as Thailand and Vietnam. While petroleum-derived synthetic rubber is preferred for some applications, the natural version has properties that are critical for products such as gloves and packaging tapes, both of which have seen demand rise during the pandemic. And as the critical component in tyres and anti-vibration parts under the hood, it is more closely associated with the automotive industry than any other.

The rubber industry is dominated by smallholders, making it difficult for producers to adjust quickly as demand changes, prices fluctuate or supply chain problems emerge.

It is not the only commodity market finding there is no easy fix. There could be a copper shortfall of 10-million tonnes by 2030 if no new mines are built, according to commodities trader Trafigura Group.

Thailand, the world's biggest rubber producer and exporter, had struggled with persistently low prices for several years before the pandemic, leading farmers to tap more trees to compensate for lower income, and giving them little incentive to plant more. Supply has tightened on demand for rubber gloves during the pandemic, and it has also been depleted by natural elements, including drought, floods and a leaf disease in the world’s top-producing countries.

“It’s definitely tightening up,” said Ann Marie Uetz, a Detroit-based partner at law firm Foley and Lardner, which represents automotive parts manufacturers. “It’s nowhere near the level of the chip shortage from our perspective so far, but it’s definitely brewing.”

Substantial purchases

Supply issues did not start to hit the US until the second half of last year, when China, the world’s biggest automotive market and top consumer of natural rubber, took advantage of low prices and a recovery in its economy to make substantial purchases, said Whitney Luckett, owner of Simko North America, a Colorado-based distributor of natural rubber — one of just three in the US.

She noticed China was stockpiling rubber for its national reserves in part through purchases from Vietnam, which makes a unique rubber grade used in tape, bandages and the sidewalls of vehicle tyres.

The buying binge kept China’s 2020 purchases of natural rubber nearly even with the prior year, even as pandemic-related disruptions sent US imports plunging 16%, according to a January report from the Kuala Lumpur-based Association of Natural Rubber Producing Countries.

The US rubber supply became so tight late last year that some distributors ran out of buffer stock, said Mike Jones, director of global sourcing at Intertape Polymer Group, which makes tape for e-commerce companies.

“Once the buying started, it didn’t just stop with China. A lot of the tyre companies were also coming back and buying rubber,” Jones said. “The supply of rubber in the US became very tight.”

That is showing up in the price of rubber futures. Natural rubber climbed to about $2/kg in late February, a four-year high, before a recent dip, Bloomberg data show.

Robert Meyer, the former CEO of rubber giant Halcyon Agri Corporation, sees prices soaring as high as $5 in the next five years. “The supply issues that we’re seeing now, they are structural,” said Meyer, now an MD with venture firm Angsana Investments in Singapore. “They will not change very soon.”

The situation is exposing the perils of just-in-time manufacturing practices, which have been the automotive industry gospel for decades, according to Tor Hough, founder of supply chain research firm Elm Analytics. By keeping inventory lean to control costs, companies are vulnerable during periods of heightened supply chain volatility.

The semiconductor shortage — worsened by vehicle makers slashing orders during Covid-19 shutdowns — could cost $61bn in lost revenue this year, according to advisory firm AlixPartners.

China’s recent rubber purchases highlighted an additional vulnerability for the US, which has no national stockpile to serve as a safety net for domestic companies, noted Dan Finkenstadt, professor at the Naval Graduate School of Defense Management in Monterey, California.

“People have believed for the longest time that market demand and capitalism would always be there,” he said. “That’s not what happens in a natural emergency where everybody’s pulling at the same time.”

Bloomberg