Rubber To Rise Amid Increased Demand, Low Supply

Rubber has slumped 15 percent in the last week, but analysts see the slump as a prelude to record highs. Prices may advance by up to 32 percent to 605 yen a kilogram ($7,407 a metric ton) by December, according to the median estimate in a Bloomberg survey. Bridgestone

and Michelin are responding to raw material price increases by raising their own prices as much as 15 percent. According to

, the expected raw material price increase is due to lower supply yields in Thailand, Indonesia, and Malaysia, where the biggest rubber growers are established. There, the top growers will fail to meet demand for the second year. Goldman Sachs estimates that stockpiles on hand are tantamount to only 69 days of demand, the lowest numbers in more than a decade. Michelin responded on February 11th by saying that higher material costs would cut about 1.5 billion euro ($2 billion) from its 2011 profits. Tire companies worldwide have responded to higher raw material costs by passing on larger prices to customers. Michelin is raising tire prices in Europe by up to 7.5 percent, and an average of 8 percent in Japan. Tokyo-based Bridgestone is increasing North America prices by 8 percent on April 1st, and by as much as 15 percent in Japan on June 1st. Additionally, Japanese tire maker Sumitomo Rubber Industries is boosting prices by up to 10 percent from May. The company forecasts a 58 percent profit tumble from the previous year. Bridgestone said on February 18th that it expects to report a 17 percent profit drop due to higher material costs and as a result of a stronger yen. The price rise is expected to continue due to increased demand and a continued supply incapable of meeting that demand. In Southeast Asia, heavier-than-usual rain has disrupted harvests. Even as farmers increase supply by 9 percent, Goldman analyst Yuichiro Isayama of Tokyo notes that farmers will not eliminate shortages, as demand picks up to its highest level since 2000. Bloomberg attributed the recent price decline to the slump across commodities and equity markets due to the conflict in Libya and after the removal of leaders in both Tunisia and Egypt. Prices for rubber could reach as high as 1,200 yen by year's end, according to Masao Kondo of Tokyo-based Commodity Intelligence. The price gained 0.9 percent, to 470.50 yen, in after-hours trading today. Kondo correctly predicted record prices in September, according to Reuters. Even if demand weakens, plantations in Thailand, Malaysia, and Indonesia are in a wintering period, with output dropping by up to 60 percent. Said D.P. Singh, vice president of consumer business Goodyear India, “The entire industry is going through very challenging times . . . Commodity prices are going up across industries but the tire industry is especially hard hit.” According to Hisaaki Tasaka, a Tokyo-based analyst at brokerage firm ACE Koeki, “Rubber users don't have much raw material stockpiled, so they have no option but to keep buying.”