The Price Crisis Part IV: China Stretches Rubber Demand

China has announced that it would put a cap on new vehicle registration in Beijing. It is the price the country is paying for its rapid economic growth. The high demand for personal vehicles has resulted in urban gridlock. It also has led to the inevitable rise in demand for more tires. The result has been soaring rubber prices that have hit record levels due to tight supplies.

China has become the world’s largest producer of automobiles and tyres. It is ranked as the world’s top rubber consumer. However, the full potential of its vehicle market is yet to develop.

While in the U.S., vehicles per 1,000 people is about 760, in China that ratio is 130. As more Chinese prosper, vehicle demand will also go up. So will the demand for rubber.

It is reckoned that when the per capita GDP touches about US$1,000, a country can expect to see its households going for car purchases. In 2001 when China hit this income figure, the demand for vehicles saw a spurt.

Soaring income is still driving up auto sales. China vehicle sales are set to outstrip the U.S. for the third consecutive year in 2011, when they are likely to hit 20 million. The sales in the first 11 months of 2010 have hit 16.4 million units and were expected to reach 18 million by 2010’s end, according to the China Association of Automobile Manufacturers.

It was in 2009 that China overtook the U.S. as the world’s biggest car market with sales growing at an incredible pace of 45% to touch 13.6 million units. This kind of explosive growth has pushed tire and rubber demand to stratospheric levels.

Even the new vehicle registration norms, which could be extended to various other cities to reduce the traffic gridlock, might have only a mild initial impact because the cap on vehicles will come at a time when more Chinese are going up the income ladder on the back of robust economic growth.

The tire demand in the aftermarket is also on healthy ground. Vehicle owners have replaced about 100 million tires in 2009, which represented about 11% of global sales. The demand for replacement tires is about twice that for OEM tires, accounting for over 2/3 shares in the domestic tire market.

China, which would need more rubber to meet the rising demand from tire and auto makers, is already facing depleted stocks. It has prompted the country to rush to the international market, pushing up the prices further.

According to Singapore-based International Rubber Study Group, global demand for natural and synthetic rubber will expand about 40% to 33.9m tons by 2020 driven by usage in China and India.

It said the world consumption may total 24.3 million tons in 2010, 15.3% higher than in 2009, and it would gain a further 6.3% in 2011.

Rain Havoc

As rains lashed Thailand, the world’s top rubber producer, the market shook further scrambling for more stocks.

Besides demand from China, the rise in crude oil prices, which hit US$91 a barrel late December 2010 on signs of recovery in the U.S. economy, also has shown its impact on rubber prices.

Despite the tough tariff on Chinese tires by the U.S., manufacturers are finding new markets, which have sustained their accelerated production. Exports have in fact jumped 30% in the first six months from a year earlier to 86.68 million units as demand from developing countries outweighed lost sales in the U.S., analysts have said.

The demand for tires, which is on an upswing, will put more pressure on rubber. China has seen lower production due to severe drought in Yunnan region at the beginning of 2010 and recent heavy rains in Hainan, the top two rubber production centers in the country.

Although tire exports have been booming, China is also focusing on developing the domestic market. It has achieved economies of scale because of the large volume production.

China has become the global tire manufacturing center, and particularly since 2004, both production and export volumes have catapulted the country to the top slot in the world.

With an expected annual growth rate of over 20% in the coming years, Chinese vehicle market would continue to drive the demand for rubber and tires. Even multinational companies, which are seeing mature markets shrink, are setting up or expanding tire and rubber production facilities in China. Already their output exceeded 50% share in the domestic market, particularly in the high-end high-performance tire segment.

Analysts point out that vehicle caps as in Beijing or withdrawal of incentives may not dampen the demand scenario.

China Automobile Industry Association has indicated that vehicle buying incentives will likely expire at the end of December as originally planned. The government had slashed a 10% tax on car sales to 5% in 2009 and then raised the rate to 7.5% in 2010, which helped sales soar 34% to 16.4 million through November.

In other words, nobody thinks rubber prices would come down now that crude oil prices are also inching up. What is worse, the rains in Thailand, Indonesia and Malaysia, the top three rubber producers, have hampered tapping resulting in lower output.

With rising vehicle demands in China, the rubber supply shortage is set to worsen as the low-production season starts in major growing countries early next year. There is unlikely to be any respite to the scorching rubber price increases. (Courtesy of Polymers & Tyre Asia)

source - www.tirereview.com