The Squeeze on Global Rubber Supplies

Extreme weather across the globe this year, from drought conditions in Russia and Ukraine to flooding in Pakistan and Canada, is lighting a fire under commodity prices. Wheat prices have spiked since June, while corn rallied to a 23-month high, coffee reached a 13-year peak, and cotton advanced to its most expensive levels since 1995. Now the price of rubber, a key industrial commodity, is taking off.

Goodyear Tire & Rubber (GT) and Cooper Tire & Rubber (CTB), the two largest U.S. tiremakers, have begun notifying customers they will raise tire prices by as much as 6.5% by early November. Bridgestone, the largest tiremaker by sales, said in late August that it's increasing prices by up to 6% in Europe, the Japanese company's second price increase this year.

The industry is facing supply problems owing to bad weather that hit rubber production in Asia. "Drought earlier this year and heavy rains later on hampered tree-tapping across Asian plantations," says Pongsak Kerdvongbundit, managing director of Von Bundit, a big natural-rubber producer and exporter based in Phuket, Thailand. "Global production will lag behind soaring demand for at least another two years."

Inventory stockpiles of rubber, also used in products like gloves and condoms, will drop 12 percent and cover just 67 days of projected demand in 2011, the lowest level in at least a decade, according to Goldman Sachs (GS) analysts in a Sept. 3 report. Consumption will outpace supply by 127,000 metric tons, the most since 2007, the bank estimates. Prices of rubber futures in Singapore may jump 20 percent by March, says Makoto Sugitani, a senior director at Newedge Japan. If so, that would work out to a record $4.20 a kilogram.

The global economic recovery and white-hot growth in China are powering demand for rubber products. World auto sales, propelled by Chinese demand, will increase 8 percent this year, to 68.5 million cars, and 7.2 percent, to 73.4 million cars, next year, figures Ashvin Chotai, London-based managing director at Intelligence Automotive Asia.

Tiremakers are passing on the higher costs, and future hikes can't be ruled out. "We don't do a lot of raw-material hedging" says Keith Price, a spokesman for Akron-based Goodyear.

Top Glove, based in Selangor, Malaysia, the world's biggest rubber-glove maker, passes on "the majority" of higher costs, says Executive Director Lim Cheong Guan. Rising costs are "a headache," says Sakae Kubota, managing director of Okamoto Industries, Japan's biggest condom maker. However, competition from other brands may limit the company's ability to raise prices, Kubota added.

The bottom line: Extreme weather in Asia has hit rubber production and has prompted tiremakers and other businesses to raise prices.

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