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Where Rubber Hits the Road

Oil prices, material shortages, and legal complications force the industry to change

September 13, 2004 | A version of this story appeared in Volume 82, Issue 37

A fabric conveyor belt strip is readied by Kevin Xie, a Goodyear rubber compounder, for a dynamic modulus test.
A fabric conveyor belt strip is readied by Kevin Xie, a Goodyear rubber compounder, for a dynamic modulus test.

The past few years have been tough for U.S. synthetic rubber producers and their customers. Beset by skyrocketing energy and raw material costs, many companies have seen their profit margins become vanishingly thin--that is, if they exist at all.

Some companies have merged with others. One declared bankruptcy and sold its business. Others have been struggling with economic uncertainties by trying to sell businesses to raise needed capital and to streamline their operations.

For example, Goodyear Tire & Rubber put its chemical business up for sale last year only to take it off the market this summer. Bayer spun off its rubber business as part of Lanxess, which says it is committed to slow-growing commodities.

International Specialty Products bought Ameripol Synpol's styrene-butadiene rubber assets after Ameripol declared bankruptcy late last year because of the depressed synthetic rubber business in North America. ISP, which was not previously in the synthetic rubber business, now owns Ameripol's Port Neches, Texas, plant.

Polimeri Europa has agreed to sell its Baytown, Texas, thermoplastic elastomer plant to Taiwan's Lee Chang Yung Chemical Industry Corp. Lee Chang already operates thermoplastic elastomer plants in Taiwan, China, and Qatar.

All the while, price-fixing lawsuits have funneled millions of scarce dollars away from rubber businesses to settlements and litigation defense.

Is it possible that brighter days are ahead?

Rainer Rueffer, a Germany-based spokesman for Lanxess, believes the industry will soon be seeing "rapid growth of sales not only in the Americas and Europe but especially in the Asia-Pacific region." The industry will soon have an opportunity to improve its profitability, he says.

John E. Quinn, president of Excel Polymers, a producer of elastomeric compounds formerly owned by PolyOne, believes that further "industry shakeout is inevitable as legal expenses, lack of profitability, and shifting global demand will make some current domestic operations obsolete and draw investment to China." Quinn was president of PolyOne's elastomers and performance additives group until August, when the company was bought by Lion Chemical Capital LLC and ACI Capital.

Business cycles in the rubber industry tend to last a long time, and the challenges of price and competition are here to stay, Quinn says. But for companies that work smarter and leaner, respond quickly to customer needs, and focus on maintaining high quality, these challenges are being at least partially offset by opportunities for growth.

After several years of flat or declining consumption, growth seems on the way. Worldwide, rubber consumption is growing. According to figures just released by the International Institute of Synthetic Rubber Producers (IISRP), total rubber consumption will rise 4.8% this year over 2003 to 17.6 million metric tons. Looking ahead, the group expects consumption to reach 20.3 million metric tons by 2008, up 21% over 2003. These predictions are up significantly from last year's best guesses.

While demand picks up, prices for raw materials are also on the rise. The fortunes of companies that make or use synthetic rubber are tied to the price of crude oil. Synthetic raw materials, notably styrene and butadiene, are products of the petroleum-refining stream, and there's no way to get around that.

Christopher J. Mudd, general manager of Dexco Polymers, a 50-50 joint venture of Dow Chemical and ExxonMobil, says, "In the good old days, crude oil cost $20 to $25 per barrel." A barrel of crude was close to $50 in August--nearly doubling in price over the past year. Natural gas is $6.00 to $7.00 per million Btus, double its normal range.

Mudd speculates that when prices first went up, many customers may have thought it was "just a spike" and put off some purchases. "As a result, last year, demand was not strong for our materials because people were waiting it out," he says. "This year, we've seen solid demand in all market segments, and we have been more successful in being able to restore our margins to some extent by pushing price increases through.

"Our customers have to try to pass these increased costs down to their customers, and it's a very difficult process every step of the way. The further away you get from a barrel of crude, the more difficult it is to pass these costs on to the market," he says.

By far, the biggest consumer of rubber of all kinds is the tire industry. And demand for cars in China is causing supplies to shrink and prices to rise. In addition, cutting-edge technology in tire engineering is making the product safer but more expensive.

"The pneumatic tire is among the most complex composite products in mass production. It consists of a variety of elastomers including natural rubber; synthetic rubbers such as polybutadiene and styrene-butadiene rubber; textiles such as nylon, rayon, and polyester; and a range of different coated steel wires," says M. Brendan Rodgers of ExxonMobil Chemical, Baytown, Texas.

Presenting a paper at the American Chemical Society Rubber Division's spring technical conference in May, Rodgers explained that tires have undergone a major evolution over the past 40 years. "In the 1960s," he said, "tires were primarily of a bias construction, and automobile tires typically reached 20,000 to 25,000 miles, after which they were replaced. In the late 1960s and 1970s, the radial tire emerged with significant improvements in mileage, fuel economy, and safety."

NATURAL RUBBER, the single largest component of a tire, is derived from latex from certain plants--particularly, the Hevea brasiliensis tree. Natural rubber is, essentially, cis-1,4-polyisoprene. Southeast Asian countries produce the vast majority of the world's natural rubber. The three largest producers are Thailand, Indonesia, and Malaysia, whose equatorial climates are ideal for growing hevea trees.

China's rapidly developing economy and concomitant love affair with the automobile have played major roles in sending natural rubber demand sky-high. IISRP expects natural rubber use to grow steadily. In 2004, worldwide consumption of natural rubber is projected to be 7.9 million metric tons, a 4.6% increase over 2003. In 2008, the institute expects natural rubber consumption to crest at 9.0 million metric tons: a 20% increase over 2003 and a sharp upward revision from earlier predictions.

The biggest consumers of natural rubber are countries in the Asia/Oceania region (excluding China) with anticipated 2004 consumption of 3.1 million metric tons. In these areas, consumption is expected to grow modestly at a rate of about 1.4% per year through 2008. Demand in China is expected to rise an average of 10.5% per year to nearly 2.5 million metric tons by 2008 from 1.5 million metric tons in 2003. Shortages in natural rubber supply are looming.

In comparison, consumption of natural rubber in North America and in Western Europe is leveling off in the 2.0 million-metric-ton range for the near future.

Natural rubber has certain properties that can't yet be duplicated with synthetic rubber. So synthetic rubber can't entirely replace natural rubber needed in items like tires and conveyor belts. But that hasn't stopped makers of these products from trying to increase synthetic rubber content, depending on the economics and performance demands of the situation.

An associate at a tire plant in Topeka, Kan., prepares medium radial truck tires for curing.
An associate at a tire plant in Topeka, Kan., prepares medium radial truck tires for curing.

"Tire manufacturers are trying to use all the synthetic rubber that they can, and people who make synthetic rubber that goes into tires and other things are seeing pretty good demand right now," Mudd says.

In fact, Goodyear, one of the world's largest producers of synthetic rubber, has developed several new proprietary synthetic rubber formulations that could help it reduce its natural rubber dependency by as much as 15% over the next few years, according to Goodyear spokesman Keith Price.

"While our newly developed synthetic rubber products do not totally solve raw material cost concerns, we have gained for ourselves greater flexibility," he says.

Although supply-and-demand issues seem to be getting resolved, litigation costs are dogging the rubber industry. Recent price-fixing investigations by the Federal Trade Commission and the European Union have created instability and insecurity. For example, in June, DuPont Dow Elastomers, a joint venture between the two chemical giants, agreed to pay $36 million to settle claims from customers who say they were overcharged for polychloroprene.

In July, Bayer agreed to plead guilty and pay a fine of $66 million to settle charges that it participated in an international scheme to fix prices of rubber additives. In March, Crompton agreed to pay $50 million to settle similar charges.

On the bright side, waste is becoming less of a problem. The industry has undertaken aggressive recycling campaigns, and "for the first time ever, used tire stockpiles are not growing--they're actually shrinking," Rubber Manufacturers Association spokesman Kevin D. Ott says. In July, the U.S.-based group of rubber product makers released a report detailing how expanding markets now consume four out of five scrap tires. In addition, it says, stockpiled scrap tires have been reduced by nearly 75% since 1980.

The report says that 80%, or about 233 million, of the 290 million scrap tires generated last year are being put to use, compared with 11% in 1990. Ott says scrap tires are being used to make nonengineered products like playground coverings, floor mats, and mulch. Also, road builders now use ground rubber incorporated into asphalt for more durable highways.

Although the current round of sales and spin-offs and antitrust difficulties seems to have died down a little, continuing consolidation and reorganization seem to be in the cards. "I expect to see a much different industry in five years as compared to today," says Jim McGraw, managing director of IISRP. "Certainly, there will be fewer players, as the most inefficient plants will be closed. I also see the more efficient operations being owned by investment groups rather than the traditional petrochemical companies.

"This appears to be becoming more of a trend," he says, "and this in itself will spark rationalization as investors demand high returns, forcing less efficient operations out of the market."


Where Rubber Hits The Road
Oil prices, material shortages, and legal complications force the industry to change

A Vibrant Market For Thermoplastics


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