Rubber is one of the most widely consumed commodities in the economy. This is used in the tyre industry, the manufacturing sector (belting, etc.) and is also widely needed in the healthcare sector. Additionally, among all the segments, tyre accounts for 3/4th of the total rubber consumption globally. The rubber industry as a whole is sub-divided into two divisions, natural rubber (made from agriculture crop) and synthetic rubber (made from petrochemicals). The production and consumption of rubber have increased at a consistent pace during the last decade. This was backed by the growth in demand mainly from the tyre sector. The total rubber production increased at a CAGR of 1.9%, from 22.55 million MT in 2006 to 26.77 million MT in 2015. Natural rubber has registered a CAGR growth of 2.5% while the synthetic rubber production managed to grow at a slower rate of 1.5%. There is no doubt that the share of synthetic rubber in total rubber production has decreased from 56.3% in 2006 to 54% in 2015.
Further analysis of the production numbers reveals that the natural rubber production suffered a big blow during the 2008-09, due to the drought in the South Asian region. However, production growth did recover in the subsequent years, till 2015. On the other side, demand was hampered by an economic slowdown in China, the largest rubber consumer. This was conjugated with a slower growth in automobile sales in most of the European and Asian countries. These issues led to an oversupply situation for the natural rubber while pushing its prices lower. The low total rubber demand also impacted the synthetic rubber consumption, which remained in surplus for 8 out of the last 10 years.
Source: International Rubber Study Group, Bloomberg and Televisory’s Research
Moreover, petrochemicals (derivative of crude oil) act as a key raw material for synthetic rubber. Therefore, crude oil price movements do have a significant impact on synthetic rubber prices and also affect its consumption pattern. A fall in the crude oil prices results in a gradual decline in the prices of synthetic rubber. Thus, companies started substituting natural rubber consumption with synthetic. However, it should be noted that the quality of natural rubber is better than the synthetic rubber. Hence, the replacement of natural rubber with synthetic was possible up to an extent.
A close look at the recent trends in the crude oil prices divulges that it fell from a high of around US$100/bbl in the mid-2014 to a low of ~US$38/bbl in December 2015. The average fall in crude oil prices from 2014 (US$98/bbl) to 2015 (US$52/bbl) stood at 47%, which impacted the movement of synthetic rubber prices as well. In addition, during the same period, the average fall in synthetic rubber prices was from US$2,600 per MT to US$2,100 per MT, registering a decline of 18%. In normal circumstances, a fall in synthetic rubber prices should have pushed its consumption higher against natural rubber. Nevertheless, the anticipated increase in consumption of synthetic rubber was offset by a simultaneous fall in the natural rubber prices. The natural rubber price during 2014-15 slumped from US$1,950/MT to US$1,560/MT, a decline of 20% mainly owing to the slower growth in China. This also kept the price ratio between natural rubber and synthetic rubber at a similar level in 2014-15. A broad comparison of natural and synthetic rubber shows that the prices of both have been declining since 2011. However, the prices of synthetic rubber have recovered in 2014 and then again registered a fall due to a decline in the crude oil prices. The below chart depicts that the natural rubber prices declined at a much higher rate in relation to the synthetic rubber (since 2011), while also making it cheaper in comparison to synthetic during the past two years.
Source: International Rubber Study Group, Bloomberg and Televisory’s Research
A decline in rubber prices for both synthetic and natural rubber has been the key cause of a sharp cut seen in the EBITDA and net profit margin of the companies operating in these segments. The major beneficiaries of the decline were the rubber consumers, such as the tyre manufacturers. The average EBITDA margin of synthetic rubber companies fell from 18.5% in 2011 to 13% in 2015, while the EBITDA margin of natural rubber companies declined from 2.5% in 2011 to 0.9% in 2014. Though, they managed to recover 3% in 2015. The EBITDA margin for the tyre manufacturing companies improved from 12.2% in 2011 to 16% in 2015. A near similar effect was seen on the net profit margins of the rubber producers and the tyre manufacturing companies during the same period.
Source: Bloomberg and Televisory’s Research
Over the past few years, the synthetic rubber segment has not performed well within the rubber industry. On one side, as crude oil prices declined, an anticipated increase in synthetic rubber consumption could not fructify amidst simultaneous fall in the natural rubber prices. Secondly, a number of planned capacity expansions were implemented by the synthetic rubber players, which eventually led to its production to rise continuously at a decent pace, which provided an excess supply into the market and kept the commodity in surplus.
Also Read:- Crude oil, trend in global demand-supply, prices and its impact on major players
Slack set out to kill E-mail
