Elastomers Bounce Back

The synthetic rubber business hit the skids a few years ago. In 2001 and 2002, volumes were down, raw material costs were high, and many manufacturers-of both rubber and tires-were losing money. Since that time, the petrochemical industry has recovered, and along with it the bulk synthetic rubber business. Products such as styrene-butadiene rubber (SBR), polybutadiene rubber (BR), and ethylene-propylene-diene-terpolymer (EPDM) have recovered nicely, and the industry is again profitable.

This year, though, the industry lost some momentum. Sales have been steady but aren't growing significantly. Feedstock prices, already high last year, have climbed even further in 2005. And Hurricane Rita has had a significant impact on the synthetic rubber industry, which has its capacity concentrated in the region hardest hit by last month's storm.

The synthetic rubber industry hit bottom in 2001, when global rubber consumption declined by 4.5% to 10.2 million metric tons, according to the Wembley, England-based International Rubber Study Group (IRSG). That decrease marked a low point in the industry, particularly in North America, which had a lot of excess capacity at the time. One U.S. producer, Ameripol Synpol, even went bankrupt in 2002 and was forced to idle its Odessa, Texas, plant.

Since 2001, synthetic rubber consumption around the world has grown each year. And in 2004, it grew by 3.7%, hitting 11.8 million metric tons, according to IRSG.

In North America, synthetic rubber demand increased by 2.8% in 2004, IRSG says, driven by improvement in the market for tires, the largest end use for products such as SBR and BR. According to the Rubber Manufacturers Association (RMA), U.S. tire shipments increased by 2.5% last year, reaching 318 million units. In an August forecast, it projected a 2.2% increase in 2005 shipments. In 2006, it expects shipments to increase by more than 2%.

John Vincent, president of Firestone Polymers, which makes SBR and BR for Bridgestone-Firestone's U.S. tire business, agrees with RMA's assessment. He says the market conditions seen in 2004 and 2005 are a far cry from the sluggishness of 2001 and 2002. Demand has been strong and will continue to be strong through 2006, he says.

But Darren E. Cooper, senior statistician at IRSG, says escalating feedstock costs are taking their toll on synthetic rubber markets. Feedstocks such as butadiene and styrene compose about 45% of the cost of making synthetic rubber, he notes. West Texas Intermediate crude oil prices, a large driver for the price of feedstocks used in synthetic rubber, have climbed from $42 per barrel at the beginning of the year to more than $65 in early October. U.S. butadiene prices, which had risen by 40% in 2004, increased by another 25% during the first nine months of this year, Cooper says.

These feedstock costs have helped push up synthetic rubber prices. BR prices rose by 40% last year, and SBR prices increased by about 50%, Cooper says. In turn, tire producers have been raising their own prices to pass these costs along to their customers. The world's major tire producers have been unable to weather the battering they have received through rising costs and have, therefore, also lifted product prices, he says.

Globally, synthetic rubber volumes were nearly flat in the first half of 2005, Cooper says. Heightened costs, it would seem, have taken their toll. He expects about 1 to 2% growth in synthetic rubber consumption next year.

Synthetic rubber consumption in North America, however, has been stronger, rising by an estimated 4.5% during the first six months of the year after slipping by about 1% last year, Cooper says.

When synthetic rubber prices are high, products such as SBR and BR can become vulnerable to substitution by natural rubber. According to IRSG, the ratio of natural to synthetic rubber prices decreased from 1.08 in the first quarter of last year to 0.84 in the second quarter of this year. Synthetic rubber prices have been so strong that there was some impact on natural rubber consumption, Cooper says.

As a result, natural rubber demand grew by about 7% in the first half of 2005, Cooper says. But rising natural rubber prices-caused by a limited increase in production out of Malaysia and Thailand-may slow growth in natural rubber demand by the end of the year. He thus expects full-year growth to be about 6%.

EPDM Producers have also noted a change in business conditions over the past two years. Things have turned up pretty significantly from a prolonged trough that we experienced, says David Kyle, technical service and development manager for Dow Specialty Elastomers.

Unlike BR and SBR, which are primarily used in tires, EPDM is driven by nontire applications such as automotive weather stripping, commercial roofing materials, wiring, plastics impact modification, and tubing. Volumes in these segments have increased with the improving economy. There was some slowdown in demand around 2001 and 2002, and then overall industry demand growth improved around the end of 2003 and in 2004, according to William Zarkalis, business director for Dow Specialty Elastomers. In 2005, we got significant growth. On average, we expect 3 to 4% growth in the EPDM market.

Steven Tranguch, global business director of Chemtura's Royalene EPDM business, says plant operating rates in EPDM have climbed from 70 to 75% in 2002 to 85 to 90% this year.

Tranguch sees a 4% annual growth rate, with the North American market growing at a 2 to 3% clip. Certain markets are driving demand. For example, he says EPDM sales into commercial construction increased by 18% last year, though growth in this segment has so far been flat in 2005.

Synthetic rubber producers were able to raise prices more than their raw material costs have increased in 2004, IRSG's Cooper says. As a result, their profit margins, notwithstanding fixed costs such as payrolls, have increased. However, raw material costs, he says, are again taking a bite out of margins in 2005.

The financial performance at synthetic rubber companies bears out Cooper's observations. Sales at Goodyear Tire & Rubber's chemical business increased by 25.5% in 2004, hitting $1.5 billion. Operating income, meanwhile, climbed 47.3%, to $177 million.

International Specialty Products (ISP), which purchased the bankrupt Ameripol Synpol business in July 2003, also improved. The company generated a loss of $3.3 million in the second half of 2003 on $25.7 million in sales. In 2004, the business earned $7.4 million on $170 million in sales.

In a vote of confidence for the business, ISP announced in March that it was nearly doubling capacity for emulsion SBR at its Port Neches, Texas, plant to 340,000 metric tons annually within two years.

Lanxess, which has a performance chemical segment that includes specialty products like butyl rubber as well as commodities such as BR, posted flat sales in 2004 versus 2003, while earnings before taxes during the period rose 8% to $142 million. During the second quarter of 2005, Lanxess' rubber sales increased by 17% to $446 million versus the year-ago period, as earnings increased 43% to $85 million.

Nevertheless, Lanxess seeks to improve the unit and is planning a restructuring focused largely on a nitrile butadiene rubber plant in France.

Lanxess isn't the only company losing patience with synthetic rubber. DSM is selling its SBR business, consisting of a plant in Baton Rouge, La., to Lion Chemical Capital, which purchased PolyOne's rubber compounding business in 2004. DSM says it is focusing on biosciences and performance materials and that the SBR business is no longer strategic. In 2004, the company shuttered EPDM capacity in Addis, La., and Japan.

Hurricane Rita, which along with Hurricane Katrina devastated the refining and petrochemical industries in September and October, had a particularly strong impact on the synthetic rubber industry. The Texas-Louisiana border area on the Gulf Coast, which was in the direct path of the storm, is home to nearly all of the BR and SBR plants in the U.S.

Only one out of five SBR plants in Texas and Louisiana-the DSM plant in Baton Rouge-avoided a shutdown because of the storm. The storm also knocked out three of four U.S. BR plants. Most of the affected producers have been down for weeks. The supply disruptions have caused tire producers to curtail some of their production because of raw material shortages.

Firestone Polymers shut down its SBR plant in Lake Charles, La., and its BR plant in Orange, Texas, on Sept. 23, a day before Hurricane Rita made landfall.

The plants managed to escape major damage. Aside from some impact to the cooling towers at both plants, the damage was not catastrophic and was contained to items like sheet metal walls and roofs, Firestone's Vincent says. Moreover, among the employees whom Firestone was able to contact, no major injuries were reported. Considering we took a direct hit, we have been very fortunate, he says.

Many employees, however, did suffer extensive damage to their homes. Those who evacuated couldn't return to the area for days. Firestone is providing food and housing for its employees at its plant sites. It also took out ads on local radio stations and a regional edition of USA Today to get the word out to employees that their jobs were waiting for them. Some 90% of the employees were contacted as of the first week of October, and by that time about two-thirds of them had returned to work.

Also slowing the return to normal operations at Firestone has been power outages and a shortage of the nitrogen needed to flush out plant equipment before restarting.

Vincent says Firestone is also fortunate that it had built up its inventory because of a recent maintenance turnaround at Lake Charles and a planned turnaround at its Orange unit. By Oct. 3, the company had been shipping rubber to its tire operations out of both sites.

Nevertheless, the company has had to adjust tire production because of the raw material shortfall, shifting production to truck tires, for which it has the strongest demand. It ratcheted down production in other products.

Firestone was not alone. Lanxess idled its Orange, Texas, site, where it makes BR, EPDM, and hydrogenated nitrile butadiene rubber. Like Firestone, it is offering assistance to its employees who have been scattered by the storm. The company says the site sustained limited structural damage and flooding. But the site has been down since the storm, and the company declared force majeure in BR. The company was able to commence shipments out of its warehouses by Sept. 30.

ISP declared force majeure for SBR because its Port Neches plant was taken down in preparation for Hurricane Rita.

Goodyear was able to resume synthetic rubber production at its Houston SBR and Bayport rubber chemical facilities after the hurricane. But its Beaumont, Texas, unit, where it makes BR, SBR, and isoprene, wasn't able to resume operations until Sept. 30. Because of the reduction in raw material supplies, the firm had to reduce production temporarily at its North American tire plants by 30%.

Reduced availability of synthetic rubber and carbon black prompted Cooper Tires to cut back production at its Texarkana, Ark., and Tupelo, Miss., plants. The company says production will be reduced by 30,000 tires per day until raw material supplies return to normal. Cooper buyers are scouring the market for alternative sources of materials from suppliers not affected by the recent storms, the company said in a statement late last month.

Firestone's Vincent says that even after all the production comes back onstream, the hurricane will have an impact on the market for the rest of the year as tire producers scramble for raw material supplies. The market will be pretty snug through the fourth quarter, he says. Moreover, he adds, raw materials, particularly butadiene, will likely continue their upward price trend for the remainder of 2005.

Tranguch is also worried about the effects the raw material spike will have on the marketplace. The hurricane is causing all of our feedstock prices to go up, he says, noting that after Hurricane Rita, Chemtura was forced to pay an extra $10,000 to $15,000 to receive its normal natural gas requirements at its EPDM plant. Otherwise, it would only have gotten a 70% allocation. He says profitability will depend on the ability to keep up with the additional costs everyone has to pay and whether you can pass those through to the final customers.

However, Tranguch says the rebuilding of the Gulf Coast region will have a positive impact on EPDM demand. The construction industry uses EPDM sheet to drape over damaged buildings. Longer term, there will be a large volume of EPDM needed to repair damaged buildings. The same effect was seen last year, he says, when three hurricanes hit Florida.

The net effect is that synthetic rubber makers are expecting even better times once weather-related woes are behind them. This is a welcome change in an industry that often has to struggle to eke out a profit.