High rubber prices through 2011

Short supply has pulled up natural rubber costs to an all-time high in China. Quotes are expected to continue increasing this year, albeit at a slower rate.

The cost of natural rubber has soared substantially in recent months. The rise is so steep that the price increases finished goods makers have implemented are not enough to cover the additional outlay.

In April 2010, natural rubber stood at around 25,000 yuan ($3,800) per ton. Prices rose shortly after and peaked at roughly 43,000 yuan ($6,560) per ton in February 2011, an all-time high in China.

While current prices have fallen to approximately 35,000 yuan ($5,460) per ton, they are still 44 percent higher year on year.

The significant rise in rubber costs came as a result of low yield. Yunnan, one of China's major rubber producing provinces, experienced severe drought last year that affected production. Indonesia and Thailand, on the other hand, were drenched in heavy rain.

Wang Jianhui, analyst at Southwest Securities, said the weather so far for this year has been good for rubber production. Rubber tapping has started in April and new natural rubber output from Yunnan and Hainan provinces, and Southeast Asia will be released soon.

This is expected to slow the pace of price increase, but not stave off any future upward adjustments. Statistics from the International Rubber Study Group show global consumption of natural rubber for 2011 is likely to rise 5 percent year on year to 11.15 million tons. And while worldwide output is forecast to grow 7 percent to 10.97 million tons, the expected yield will still be 180,000 tons short.

Tires are one of the products most affected by the high cost, especially since the product is 80 percent natural rubber. The material, in fact, accounts for 40 to 50 percent of total unit cost. Because of the rising cost of rubber, suppliers have had to raise export prices three times in this year alone. Quotes are now 15 to 20 percent higher than in late 2010.

But this adjustment is barely half the increase in natural rubber costs. This has forced several small tire suppliers in Shandong province to close down, while others have chosen to suspend production temporarily.

The Shandong Jinyu Group is one such company. The tire manufacturer went on an extended spring festival break in February, resuming operations three days after the official holiday period. Some companies closed their factories for an additional 20 days. Such suppliers believe that with the high cost of rubber, more money will be lost with every production run.

The China Rubber Industry Association estimates 2010 profit loss at 22 percent year on year. Its data also shows 26 percent of tire companies in China saw margins shrink that year.

Unfortunately for tire suppliers, there are currently no suitable alternatives to natural rubber. While there is synthetic rubber, the technology at China factories is not advanced enough to ensure product safety. It may take three to five years before synthetic rubber can be used safely in tire production.

The sports balls industry is at an advantage in this regard. Unlike tire makers, companies can use less expensive alternatives to help minimize the impact of cost increases.

Elans Sporting Goods Co. Ltd, for instance, is promoting products made with less natural rubber to its customers. Synthetic rubber can be used for the bladder, while covers can be in recycled or synthetic rubber, or PVC.

The quality of balls using these alternative materials, however, is inferior to natural rubber, particularly in terms of elasticity and durability. The life span of such products is typically one to three years shorter than those made from natural rubber.