Rubber Scarcity Creates New Headache for Automakers
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Automakers struggling with pandemic-induced plant shutdowns and a global chip shortage now are confronting another supply chain headache: dwindling rubber supplies.
Snarled shipping lines are disrupting the movement of natural rubber, a key material used in tires as well as components under the hood. With the global supply already running short after stockpiling by China and a devastating leaf disease, rubber prices are on the rise and some U.S. auto suppliers are rushing to secure shipments before the market gets squeezed further.
As companies in virtually every market grapple with shortages, perhaps no industry is being hit harder than autos. Multiple plants have been idled by a semiconductor crisis that鈥檚 costing tens of billions of dollars in lost revenue, while materials from seating foam to metal to plastic resin also are becoming harder to find. The industry, which long has relied on just-in-time manufacturing to reduce costs, is finding it has limited flexibility to deal with supply chain disturbances wrought by the pandemic.
Rubber sap drips from a tree at a plantation in Thailand. (Brent Lewin/Bloomberg)
The rubber shortage threatens to further disrupt vehicle production just as demand rebounds and the Biden administration douses the U.S. economy with $1.9 trillion in stimulus spending. And rubber problems could prove particularly thorny because the trees need seven years to mature, making it unlikely the supply will bounce back quickly.
鈥淚t鈥檚 like paper towels early on during the COVID crisis,鈥 said Steve Wybo, who heads the auto practice group at consulting firm Conway MacKenzie outside Detroit. 鈥淚f you can get your hands on some plastic, or some rubber, you鈥檙e going to order more than you need because you don鈥檛 know when you鈥檙e going to be able to get it next.鈥
Carmakers including Ford Motor Co. and Stellantis NV, formerly known as Fiat Chrysler, said they鈥檙e monitoring the rubber situation but have yet to feel an impact. General Motors Co., similarly, said it isn鈥檛 worried about its rubber supply. France鈥檚 Michelin, one of the world鈥檚 largest tire makers, is skirting port congestion by using airfreight shipments direct from Asia.
But for suppliers reliant on U.S. distribution, rubber already is a concern.
鈥淚鈥檝e got everybody alerted that I鈥檒l take materials as fast as they can get it to me,鈥 said Gary Busch, director of global procurement at Carlstar Group, which makes tires for off-road and agriculture vehicles.
Natural rubber is produced from the white sap of trees found in the warm, humid climates of countries such as Thailand and Vietnam. While petroleum-derived synthetic rubber is preferred for some applications, the natural version has properties that are critical for products such as gloves and packaging tapes 鈥 both of which have seen demand rise during the pandemic. And as the critical component in tires and anti-vibration parts under the hood, it鈥檚 more closely associated with the auto industry than any other.
The rubber industry is dominated by smallholders, making it difficult for producers to adjust quickly as demand changes, prices fluctuate or supply chain problems emerge. It鈥檚 not the only commodity market finding there鈥檚 no easy fix: There could be a copper shortfall of 10 million tons by 2030 if no new mines get built, according to commodities trader Trafigura Group.
Thailand, the world鈥檚 biggest rubber producer and exporter, had struggled with persistently low prices for several years prior to the pandemic, leading farmers to tap more trees to compensate for lower income 鈥 and giving them little incentive to plant more. Supply has tightened on demand for rubber gloves during the pandemic, and it also has been depleted by natural elements, including drought, floods and a leaf disease in the world鈥檚 top-producing countries.
鈥淚t鈥檚 definitely tightening up,鈥 said Ann Marie Uetz, a Detroit-based partner at law firm Foley and Lardner, which represents auto parts manufacturers. 鈥淚t鈥檚 nowhere near the level of the chip shortage from our perspective so far, but it鈥檚 definitely brewing.鈥
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Supply issues didn鈥檛 start to hit the U.S. until the second half of last year, when China, the world鈥檚 biggest auto market and top consumer of natural rubber, took advantage of low prices and a recovery in its economy to make substantial purchases, said Whitney Luckett, owner of Simko North America, a Colorado Springs, Colo.-based distributor of natural rubber 鈥 one of just three in the U.S. She noticed China was stockpiling rubber for its national reserves in part through purchases from Vietnam, which makes a unique rubber grade used in tape, bandages and the sidewalls of vehicle tires.
The buying binge kept China鈥檚 2020 purchases of natural rubber nearly even with the prior year, even as pandemic-related disruptions sent U.S. imports plunging 16%, according to a January report from the Kuala Lumpur-based Association of Natural Rubber Producing Countries.
The U.S. rubber supply became so tight late last year that some distributors ran out of buffer stock, said Mike Jones, director of global sourcing at Intertape Polymer Group, which makes tape for e-commerce companies.
鈥淥nce the buying started, it didn鈥檛 just stop with China. A lot of the tire companies were also coming back and buying rubber,鈥 Jones said. 鈥淭he supply of rubber in the U.S. became very tight.鈥
That鈥檚 showing up in the price of rubber futures. Natural rubber climbed to about $2 a kilogram in late February, a four-year high, before a recent dip, Bloomberg data show. Robert Meyer, the former CEO of rubber giant Halcyon Agri Corp. Ltd., sees prices soaring as high as $5 in the next five years.
鈥淭he supply issues that we鈥檙e seeing now, they are structural,鈥 said Meyer, now a managing director with venture firm Angsana Investments Private Ltd. in Singapore. 鈥淭hey will not change very soon.鈥
The situation is exposing the perils of just-in-time manufacturing practices that have been auto industry gospel for decades, according to Tor Hough, founder of supply chain research firm Elm Analytics. By keeping inventory lean to control costs, companies are vulnerable during periods of heightened supply chain volatility. The semiconductor shortage 鈥 exacerbated by automakers slashing orders during COVID-19 shutdowns 鈥 could cost $61 billion in lost revenue this year, according to advisory firm AlixPartners.
China鈥檚 recent rubber purchases highlighted an additional vulnerability for the U.S., which has no national stockpile to serve as a safety net for domestic companies, noted Dan Finkenstadt, professor at the Naval Graduate School of Defense Management in Monterey, Calif. The U.S. government could create its own stockpile, or provide loan guarantees to companies to finance their own extra supply, he said.
鈥淧eople have believed for the longest time that market demand and capitalism would always be there,鈥 he said. 鈥淭hat鈥檚 not what happens in a natural emergency where everybody鈥檚 pulling at the same time.鈥
With assistance from Skylar Woodhouse, Mai Ngoc Chau, Keith Naughton and David Welch.
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