Quarterly overview of rubber raw materials markets: July 2023

Every quarter we analyse pricing in the rubber raw materials markets, identifying trends and the patterns that point towards where prices might go next. This quarter the key issues concern materials sourcing amid the trade bans with Russia and the impact on high tech elastomers as the automotive industry turns electric.

Materials pricing: are we facing the calm before the storm?

Materials pricing today is relatively stable, with some – but not all – material prices drifting downwards. Most materials, with the exception of some of the speciality high-performance elastomers, are available. However, this situation is unlikely to last. Significant uncertainties in the industry and in global geo-politics remain. Primary among these are relations with Russia.

In response to Russia’s war with Ukraine, an EU ban on imports of carbon black and rubber from Russia will come into force from July 2024. This will have a significant impact as currently Russia is – by far – the largest source of imports of rubber related materials to the EU, including carbon black, BR, polyisoprene, halobutyl, butyl and E-SBR. The EU imports more than twice as much rubber material from Russia as it does from the next-largest source, the United States.

The rubber industry has been cutting use of these materials where they can, but some Russian materials – such as synthetic polyisoprene (IR) – are particularly hard to substitute. The supply-demand balance has depended on Russian imports for many years and the West has found it difficult to build extra capacity to replace the Russian materials. China and India do not currently have bans on Russian materials, but it is difficult to estimate availability or price when sold on into global markets.

We have already seen a steady decline in imports to the EU of various materials from Russia. Some manufacturers are likely to stock up on Russian materials ahead of the ban (during the first half of 2024) and consume that material in the second half of 2024. As those stocks run out into 2025, we are likely to see some capacity for ‘green’ raw materials, such as recovered carbon black and bio-sourced elastomers coming on stream.

We are seeing changes in the automotive market for high-tech elastomers, in particular a reduction in the use and production of Ethylene Acrylic Elastomer (AEM), such as Vamac, HNBR, fluoroelastomers and other materials. ?This is being driven in large part by the automotive industry’s focus on electric vehicles while winding down manufacture of vehicles with internal combustion engines. Demand for all these materials was driven largely by the need for high-temperature oil resistance in high-power internal combustion engines. The outlook for those applications is now uncertain.

Natural Rubber

Prices of natural rubber have been fairly stable since February 2023. After a slow increase, prices are now drifting downwards, at least in the short term. This is likely to be due to weaker demand in the Chinese economy following its reopening at the end of the year.

Although signs are suggesting that demand for trucks and logistics is already starting to pick up in China, prices are unlikely to recover significantly before Q4, when the traditional NR Wintering season sets in.

Synthetic polyisoprene

Out of total EU imports of 125kt IR in 2021, Russia provided 116kt. The USA, the next-largest source provided just 3.6kt. In the months since the invasion, imports from Russia have plunged to 94kt in 2022 and about 21kt in 2023, while imports from China, Japan, Taiwan and a few other countries has steadily increased.

The developing shortage of IR has two implications for the NR trade. First, tyre makers will seek to increase NR consumption in line with the decline in availability of IR from Russia. ?Second, we expect that tyre makers will seek to build stocks of essential IR grades ahead of the July 2024 import deadline. That will lead to an increase of IR imports from Russia, probably in the first six months of 2024. That said, in volume terms, IR volumes are small compared to that of NR, so we do not expect a significant change in prices or the supply/demand pattern.

BR & SBR

Imports of BR from Russia were very similar to the volumes of IR coming in from Russia, but the market for BR was only just in balance prior to Russia’s invasion of Ukraine. Taking that 100kt from Russia out of the market initially caused a significant imbalance in supply. Suppliers have just about kept pace with demand, and there was some relief among suppliers that demand has been subdued in the first half of 2023.

Overall imports of BR to the EU have been falling over the last year, as imports from Russia have declined. Imports from other regions has not significantly changed in that period. Imports of E-SBR to the EU hit a low in the last couple of months of 2022, but returned to near-normal levels (around 3kt/month) in the first four months of 2023.

The impact of a sharp slow-down in demand has magnified in the up-stream value chain, as all companies in the space seek to minimise the build-up of inventory. In addition, there have been some production changes including the closing of some facilities and opening of new production plants by some major BR producers.

Until these changes are settled there is a possibility that BR an SBR will go short again, especially if demand picks up in Europe and China later this year, before any increased capacity comes on stream to replace the 100kt or so of volume lost from Russian imports.

Carbon black

There is good availability of carbon black in the market today, although the proposed ban on Russian imports hangs over the industry. Prior to Russia’s invasion of Ukraine, Russia shipped around 550kt of carbon black to Europe, and Ukraine shipped a further 50kt in a total European market of 1500kt or so. In 2022, the volume from Russia dropped to under 450kt, and it has dropped further in the first four months of 2023, to an annualised rate of just 270kt.

To partially compensate, imports of carbon black to Europe from India and China have increased, but in recent months, the volume from these two countries has not compensated fully for the decline in imports from Russia, Ukraine and Belarus.

We expect the picture in carbon black to reflect the situation in isoprene rubber. In the first half of 2024 imports from Russia will increase ahead of the July 2024 ban, before reducing sharply after the ban comes into force. There is a difference in the carbon black space, however, and that is recovered carbon black (rCB).

Common estimates suggest that an additional 300kt of rCB is likely to come on stream in the 2024-25-time frame, most of it in the European sphere. This is being driven by companies, who are pushing the use of renewable and circular materials in their product portfolios, and also, perhaps with an eye on the supply-demand situation in carbon black from 2024 onwards.

Whatever progress there is in the availability of high quality rCB, it seems likely that prices of carbon black may fall further as energy prices drop over the summer but will then increase as we get into the third quarter on higher energy prices and increasing tightness in the marketplace.

Halobutyl

EU imports of halobutyl rubber were historically dominated by material sourced from Russia. Since the invasion, total imports have remained level, except for a surge over the summer of 2022 and a subsequent reduction in the last quarter of 2022. However, the sources have changed. Exxon is now shipping a lot more material from its UK plant in Fawley, while imports from the United States and China have also increased to a couple of hundred tonnes per month, from essentially zero.

EPDM

After years of very tight supply, the situation in EPDM appears to be easing. There is now good availability of materials in all grades and prices are starting to fall –?very gently – from the very high rates seen over the last couple of years.

However, prices are still high by historical standards and are unlikely to fall much further. As with other materials, the uncertain economic environment means that no new capacity is likely to come on stream, while some producers have either closed or announced closures until the demand from the automotive sector over the next 10 years becomes clear.

Nitrile & HNBR

The situation in HNBR is like that in Vamac. There simply is not enough material around, with major producers “allocating” volume.

In standard NBR, there are some reductions in the market, as different players from Asia or the Americas either come into (or depart from) the European market, depending on the prices they can get in their home markets.

Nevertheless, there are some similarities with the EPDM market. Availability has improved and prices are starting to ease a little. However, some consumers will not see the benefit of those price reductions for a few months, as there is still a lot of stock bought at high prices in the supply chain, and this is taking some time to work through the different partners.

?AEM/ACM

The supply chain is under severe pressure as producers of AEM (Vamac) wind down production in light of reduced demand as automotive manufacturers transition to electric vehicles. However, the market has not yet completely transitioned, resulting in shortages of AEM and ACM that is holding up some automotive production lines.

Some producers are actively encouraging their customers to formulate away from their products, to ease the current supply constraints. While most other materials have seen a level of softening in prices, this sector has seen significate price increases and for the foreseeable future will remain at these levels or possible increase further if demand remains high.

Fluoroelastomers

As a fluorinated material, the production of fluoroelastomers (FKM) is under scrutiny from the EU and other authorities. Any process that uses perfluoroalkoxy alkanes (PFAs) also known as ‘forever chemicals’ in the process – such as a surfactant –?is under close scrutiny as various authorities seek to ban these chemicals.

Some producers have announced ending production of fluoropolymers, including 3M which has announced it will quit that business from the end of 2025. Most FKM is used in applications with high chemical aggression and high temperatures, situations do not occur in EVs, which means demand will continue to drop significantly in the automotive market at least.

Polychloroprene

Polychloroprene continues its slow death. No-one is writing specifications for CVJ boots (or any other application) in terms of polychloroprene, so demand will only decline as available capacity also declines. Any company still using polychloroprene would be well advised to urgently seek to re-design the compound around another elastomer.

Paul Hallas is the Managing Director of SPC Rubber Compounding.

In association with David Shaw, Head of Research, Tyre Industry Research

About SPC Compounding Group

SPC is a specialist rubber compounder. With an expertise in high quality technical specifications, SPC Compounding materials are used in critical components in the aerospace, automotive, chemical, dairy, defence and energy industries. SPC Compounding covers common compounds such as, EPDM, HNBR, NBR, NR, FKM, as well as unique recipes tailored to their clients’ needs. SPC has manufacturing plants in England, Wales and Spain and, in 2018, was named as one of The Telegraph and London Stock Exchange’s 1,000 Companies to Inspire Britain.