Will the rising cost of rubber drive up tyre prices for consumers?

Will the rising cost of rubber drive up tyre prices for consumers?

9 July 2010 1,317 views 2 Comments

An often overlooked, but indispensable element of the tyre manufacturing industry is the procurement process of natural rubber.

Natural rubber (often shortened to NR) is predominantly farmed in Thailand, Indonesia, India and Malaysia and is “tapped” from the Para rubber tree (or as pointed out by David below hevea Brasiliensis – Latin). Upon wounding, the para rubber tree responds by producing latex, in liquid form. This is refined into a useable rubber material.

Thailand, the world’s largest natural rubber producer (accounting for over 3.24 million tons per year) has suffered a prolonged monsoon period devastating latex output. The Kerala region of ~~Thailand~~ India – which produces 90% of all natural rubber exported – has been hit particularly badly, with plantations unable to meet demand.

This limited stock availabilty has driven natural rubber prices up to an all time high of £2.53 per kg. This has risen sharply from the £0.91 per kg rate widely available in late 2008.

So what does all this mean to the consumer?

Inevitably this increase in raw materials will be passed on to the end user, as a rise of 178% in 18 months is not sustainable long term for any profit making organisation.

Michelin managing partner Jean-Dominique Senard spoke to Reuters and stated the following:

Today it would seem that the rise in raw material (prices) is continuing. For natural rubber prices are extremely firm… We’ll have to wait a few weeks more to know if that really reflects an economic upturn worldwide, or (whether) circumstances more specific to producer countries (prove otherwise)

According to a study by Deutsche Bank analysing purchasing receipts, Michelin spends €950 million on natural rubber, which accounts for a 6% share of total global tyre revenue of €15.8 billion.

Based on these figures, Deutsche Bank conservatively estimated the consumer price increase to be 5% within the next 6 months.

The price of tyres look set to continue rising for the forseeable future.

Picture Credits: Tony Rodd on Flickr

This post was published by Daniel Doyle. I'm the chief publisher here at the tyre blog overseeing its development and article base, whilst offering my viewpoints from time to time. So far, the number of posts I've published are: 19.

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2 Comments »

David Shaw said:

Umm, you know that Kerala is the main rubber growing district in India, right? And while the tree used to be called the Pará rubber tree back in Victorian times, people now use the Latin name, hevea Brasiliensis.

Also NR is a traded commodity, like oil and gold, in which the price is influenced by fundamentals such as supply and demand, but also by speculation, which is not predictable.

That aside, yes, spot NR prices are bouncing around all-time highs and tyre prices have been going up, more or less in parallel with the price of NR.

You should also note that NR is a relatively small component in car tyres which tend to use much more synthetic rubber, whereas NR is used in truck tyres and earthmover tyres. A 10 kg car tyre contains (on average) around 14 percent NR. A 50 kg truck tyre contains around 27 percent NR.

So if the price of a product is based on the cost of its raw materials (a fairly unrealistic assumption) then you might expect truck tyres to increase at twice the rate of car tyres. Market data does not suppport this.

In reality, increases in tyre prices are more a reflection of the fact that global tyre factories are more or less full, than the direct cost of raw materials.

Currently, we have a small surplus of demand over supply, which tends to permit prices to rise. Since there are few surplus tyres, there is less price competition, and that allows prices to rise where in the past, a surplus of tyres has held down prices.

Into the future, that demand surplus is likely to continue for the foreseeable, so no matter what happens to rubber prices, tyre prices will (IMHO) continue to rise.

Dave S

# 15 July 2010 at 1:13 pm

Daniel Doyle said:

Hi David,

Thank you for your comments. I have updated the original post to reflect what you have pointed out. They are very interesting points indeed and I’ve taken note of what you said, especially the stats on the components of car tyres. I appreciate the help.

# 26 July 2010 at 3:01 pm