Manufacturing Supply Chains Brace for Impact Amid Looming Shortage of Natural Rubber

Manufacturing Supply Chains Brace for Impact Amid Looming Shortage of Natural Rubber

Executive Summary

  • As supply chain managers continue to face the ripple effects from a global semiconductor shortage, medical equipment and car makers are now on high alert due to the growing threat of scarce natural rubber supplies that has intensified over the past 12 months amid the global outbreak of COVID-19. 
  • Natural rubber is a critical raw material in many industrial supply chains because of its unique properties such as high durability, flexibility, and water resistance that make it invaluable for a wide range of products, including high-performance auto and aircraft tires, electronic cables, and medical devices.
  • While contract prices for natural rubber have reached a four-year high in the first months of 2021, and have overall spiked by about 77 percent since April 2020, shipping lead times of rubber orders have increased five-fold in recent months, highlighting the growing difficulties of securing enough supply that many manufacturers will face in the short to medium-term. 
  • With synthetic rubber being a viable alternative only for specific applications and rubber trees needing about seven years to mature, available supply is unlikely to expand significantly in the near future, prompting industry experts to anticipate prices rising within the next few years to the levels experienced at the height of the extreme rubber shortage in 2011. 
  • Customers should seek to identify which critical components in their supply chain are made of natural rubber, and contact their sub-tier suppliers to assess stock levels of both these components and raw materials, and the degree of substitutability of these parts with synthetic rubber.
  • To mitigate rising procurement costs and limit the risk of having to buy on the spot market, companies should also make sure to have secured enough natural rubber quota for their production forecasts in 2021 and, at the same time, prioritize concluding long-term contracts with suppliers for 2022.

In a nutshell: What you need to know about the current rubber shortage 

As supply chain managers continue to face the ripple effects from a global semiconductor shortage which has spread from the automotive industry to consumer electronics and household appliances, medical equipment and car makers are now on high alert due to the growing threat of scarce natural rubber supplies that has intensified over the past 12 months amid the global outbreak of COVID-19. 

The extent of this new threat was underlined by the results of a new survey from the Munich-based Institute for Economic Research (Ifo) which found that 71.2 percent of German companies active in the rubber and plastics industry have been facing raw material supply shortages over the past three months, more than in any other German industry. Several key factors seem to play a decisive role in the current supply and demand imbalance: impacts from extreme weather; COVID-19 induced labor shortages in a handful of countries in Southeast Asia producing natural rubber; as well as strong demand for products such as medical gloves during the pandemic. 

Natural rubber is a critical raw material in many industrial supply chains because of its unique properties such as high durability, flexibility, and water resistance that make it invaluable for a wide range of products. These include high-performance auto and aircraft tires, electronic cables, and medical devices. No direct replacement material that possesses all these properties is currently available on the market.

IndustriesMain products using natural rubber
AutomotiveCar tires; anti-vibration parts
Aerospace & Heavy IndustriesPlane, truck, and vehicle tires
Medical equipmentGloves; needle parts; catheters; cardiac pacemaker leads; bandages
Textile & ApparelShoe soles
Consumer goodsToys; baby products; foam mattresses; refrigerator seals
PackagingTape
Other manufacturingWire insulation; electrical part insulation; gaskets
Figure 1: Overview of main industries and products relying on natural rubber. Source: Everstream Analytics

Although the growing supply shortage has yet to halt entire production lines akin to the shortage of semiconductors, contract prices for natural rubber have reached a four-year high in the first months of 2021, and have overall spiked by about 77 percent since April 2020. Moreover, shipping lead times of rubber orders have increased five-fold in recent months, highlighting the growing difficulties of securing enough supply that many manufacturers will face in the short to medium-term. The effects have already been experienced by tire makers in Germany and France which forced them to slow down production from February 2021. Procurement costs are anticipated to increase by up to EUR 200 million (USD 244 million) in 2021. 

With synthetic rubber being a viable alternative only for specific applications and rubber trees needing about seven years to mature, available supply is unlikely to expand significantly in the near future, prompting industry experts to anticipate prices rising within the next few years to the levels experienced at the height of the extreme rubber shortage in 2011.

Automotive, mechanical engineering industries brace for impact

Figure 2: Natural rubber contract prices for grade PSSS3 in USD/kg between April 2020 and February 2021. Source: Singapore Commodity Index

As supply has been outpaced by demand following the initial COVID-19 lockdown period in the first half of 2020, industries relying on natural rubber have been facing steep price increases of annual rubber contracts that have reached a four-year high in February 2021. Since April 2020, prices for one kilogram of natural rubber have increased by about 77 percent, according to the Singapore Commodity Exchange.

Although there are many rubber-made components in a commercial vehicle, major car makers such as General Motors and Volkswagen have so far not experienced any shortage of natural rubber in their supply chains, while others such as Stellantis Group have announced that they are closely monitoring the situation. This is in contrast to sub-tier automotive suppliers for which the growing scarcity coupled with the current turmoil in the logistics market — particularly following the Suez Canal closure in March 2021 — has already led to some supply chain adjustments. As normal shipping lead times for orders have increased from the typical 2-8 weeks to over 40 weeks in 2021, France-based Michelin, the second largest tire manufacturer in the world, has been forced to expedite shipments from Asia via air freight instead of ocean, the typical mode of transportation for rubber due to its low cost. Despite this move, the company still had to slow down production at several plants since February 2021 due to shortages at its sites.

Shipping lead times for natural rubber

Normally2-8 weeks
Currently40+ weeks
Figure 3: Shipping lead times for natural rubber. Source: Wirtschaftswoche

Similarly, Germany’s top tire maker Continental has reportedly set up a task force to monitor the rubber shortage around the clock and work directly with suppliers and forwarders on alternative transport capacity and routes. It expects sourcing costs to increase by EUR 200 million (USD 241 million) in 2021, mainly due to increased costs for rubber, which typically accounts for 25-33 percent of raw material costs for the largest tire makers.

Apparel, electronics, and machinery makers also on high alert

Figure 4: Global rubber market share. Source: Specialchem

While tires account for about 66 percent of global demand for natural rubber, the raw material is equally vital for a number of non-tire automotive parts such as anti-vibration components and seals that are likely to also be affected by the current dynamics. 

The construction, mechanical engineering, electronics, and shoe industries are also at risk of experiencing the effects of the growing natural rubber shortage. Smaller sub-tier suppliers — with limited market power due to their size — producing rubber-based technical components for these industries could face significantly extended shipping lead times for natural rubber that will likely impact their ability to deliver on-time. This is a particular concern for additional orders that are placed on top of conservative demand forecasts made in 2020 amid the COVID-19 pandemic, and thus outside of previously agreed contract quotas between industrial sub-tier suppliers and natural rubber producers. 

And now for the backstory: the underlying reasons for the current rubber shortage

Figure 5: 2018 Rubber exports by country. Source: Global Rubber Markets (GRM)

Natural rubber is produced from the white sap of the Heavea brasiliensis tree, which is abundant in areas with a tropical climate. Major producers are heavily concentrated in Southeast Asia, with Thailand being the largest producer and exporter, accounting for more than one-third of global exports of natural rubber, followed by neighboring Indonesia, Vietnam, and Malaysia. 

Following the global supply shortage in 2011, which was sparked by severe flooding in Thailand and Indonesia as well as strong demand from China, rubber plantations were encouraged by high prices to plant more rubber trees, which caused an oversupply in the market and led to lower prices in the following decade. The persistently low prices have since given farmers little incentive to plant more trees, while the absence of larger natural rubber producing companies makes it more difficult for the market to adjust quickly when demand changes, prices fluctuate, or supply chain issues occur. As supply started to tighten in mid-2020 due to the exponential demand for rubber gloves amid the COVID-19 pandemic, farmers have also faced a labor shortage due to COVID-19 restrictions for migrant workers. 

Figure 6: 2020 Precipitation levels in Southeast Asia compared to normal precipitation, in %. Source: Everstream Analytics

In addition, with the leading natural rubber export countries all located in Southeast Asia, the global supply of rubber is exposed to weather disruptions, which were particularly extreme in 2020. Thailand has experienced its worst drought in decades in the early part of 2020, followed by severe flooding in its southern region which damaged rubber plantations. Likewise, neighboring Vietnam was particularly affected by an above-average typhoon season, with nine named typhoons having made landfall on its coastline and some of them moving inland towards Thailand. The high levels of precipitation in parts of Southeast Asia further created a favorable environment for a fungal leaf disease that damages rubber trees, one that has been spreading in the region since 2019.

On the demand side, Chinese natural rubber distributors have started to replenish rubber stocks, including its national reserves, in the latter half of 2020 as the economy recovered. In total, Chinese purchases of natural rubber in 2020 were similar to 2019 levels despite the COVID-19 pandemic, according to the Association of Natural Rubber Producing Countries. 

On the logistics side, importers have also struggled with container shortages and capacity crunches as natural rubber is typically transported by ocean due to its low value. The Suez Canal closure in March 2021 with its subsequent port congestion and delays further exacerbated the extended shipping lead times from Asia. 

What to expect for 2021 and how to prepare 

As rubber trees need about seven years to mature, available supply is unlikely to expand significantly in the near future. With global car production expected to increase by 9 percent in 2021, according to IHS Markit, industry analysts anticipate prices to further rise and potentially approach the USD 5 (EUR 4.12) mark per kilogram within the next few years. At this level, prices would near the record high experienced at the height of the extreme rubber shortage in 2011.

During past rubber shortages, procurement professionals have turned to the petroleum-derived synthetic rubber as an alternative where possible, although the degree to which natural and synthetic rubber can act as substitutes is application-dependent. One can, however, expect synthetic rubber prices to also rise to a certain extent as a result of sharp increases of natural rubber prices, as was the case during both the rubber shortages of 2011 and 2017.  

To mitigate rising procurement costs and limit the risk of having to buy on the spot market, companies should make sure to have secured enough natural rubber quota for their production forecasts in 2021 and, at the same time, prioritize concluding long-term contracts with suppliers for 2022. Given the current market situation, suppliers may be reluctant to agree on long-term contracts, so organizations could include additional surcharges depending on how market prices evolve.

INFO BOX: Rubber shortages of 2011 and 2017
Current price levels are approaching those experienced in 2017 but remain far below those experienced in 2011. 
It took about 12 months for prices to normalize following the shortage in 2017, and 3 years from their peak in 2011. 
Spreading impact of damaging fungal leaf disease and strong post-COVID-19 demand are likely to be key differences in the current shortage.

Customers should work to identify which critical components in their supply chain are made of natural rubber, and contact their sub-tier suppliers to assess stock levels of both these components and raw materials, and the degree of substitutability of these parts with synthetic rubber. Due to the possibility of extended shipping lead times of 3-9 months, particular attention should be paid in case order volumes have exceeded the initial forecasts as lower sub-tier suppliers could face challenges in receiving deliveries for additional volumes. Ultimately, end customers could intervene with raw material suppliers on behalf of their key suppliers in case delivery delays threaten to disrupt production.

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