First chips, and now automakers face a new shortage: rubber
Car manufacturers struggling with pandemic plant downtimes and a global shortage of chips are now confronted with further problems in the supply chain: dwindling demand for rubber.
Growling shipping companies disrupt the movement of natural rubber, a key material for tires and components under the hood. With global supplies running out after China's supplies and a devastating leaf disease, rubber prices are rising and some US auto suppliers are rushing to secure supplies before the market comes under further pressure.
With companies struggling with bottlenecks in virtually all markets, perhaps no other industry is more affected than automobiles. Several plants were shut down by a semiconductor crisis that cost billions of dollars in lost sales, and it is also becoming harder to find materials, from seat foam to metal to plastic resin. The industry, which has long relied on just-in-time manufacturing to drive costs down, is finding it has limited flexibility to deal with the supply chain disruptions caused by the pandemic.
The rubber shortage threatens to further disrupt vehicle production as soon as demand recovers and the Biden government burdens the US economy with $ 1.9 trillion in stimulus spending. And rubber issues could prove particularly delicate as it takes the trees seven years to mature, making the supply unlikely to recover quickly.
"It's like paper towels at the start of the Covid crisis," said Steve Wybo, who heads the Conway MacKenzie auto practice group outside of Detroit. "If you get your hands on some plastic or rubber, you'll be ordering more than you need because you don't know when to get it next."
Automakers like Ford Motor Co. and Stellantis NV, formerly known as Fiat Chrysler, say they are monitoring the rubber situation but are not feeling any effects yet. General Motors Co. also says it is not concerned about rubber supplies. France's Michelin, one of the world's largest tire manufacturers, bypasses port congestion by using air freight transports direct from Asia.
However, rubber is already a problem for suppliers who rely on US sales.
"I made everyone aware that I was going to get materials to me as soon as possible," said Gary Busch, director of global procurement for the Carlstar Group, which makes tires for off-road and agricultural vehicles.
Natural rubber is made from the white tree sap found in the warm, humid climates of countries like Thailand and Vietnam. While petroleum synthetic rubber is preferred for some applications, the natural version has properties that are vital for products like gloves and packaging tapes - both of which saw a surge in demand during the pandemic. And as a critical component in tires and anti-vibration parts under the hood, it is more closely related to the auto industry than any other.
The rubber industry is dominated by smallholders, making it difficult for producers to adapt quickly when demand changes, prices fluctuate, or supply chain problems arise. It's not the only commodities market that finds there is no easy solution: there could be a copper shortage of 10 million tons by 2030 if no new mines are built, according to commodities trader Trafigura Group.
Thailand, the world's largest rubber producer and exporter, struggled with persistently low prices for several years prior to the pandemic, prompting farmers to cut down more trees to make up for lower incomes - and give them little incentive to do more plants. The supply has tightened during the pandemic due to the demand for rubber gloves and has also been depleted by natural elements such as drought, flooding and a leaf disease in the highest-producing countries in the world.
"It's definitely getting tighter," said Ann Marie Uetz, a Detroit partner at Foley and Lardner LLP, a law firm that represents auto parts manufacturers. "From our point of view, it's nowhere near as bad as the chip shortage, but it's definitely brewing up."
It wasn't until the second half of last year, when China, the world's largest auto market and major consumer of natural rubber, took advantage of low prices and a recovery in its economy to make substantial purchases, did the US begin to face supply problems Whitney Luckett, owner of Simko North America , a Colorado Springs, Colorado-based natural rubber distributor - one of only three in the United States. She noted that China was stockpiling rubber for its national reserves, in part through purchases from Vietnam, which makes a unique type of rubber used for tape, bandages, and sidewalls of vehicle tires.
U.S. imports fell 16% in January as U.S. imports fell 16%, according to a January report by the Kuala Lumpur-based Association of Natural Rubber Producing Countries.
U.S. rubber supplies became so scarce late last year that some retailers are running out of buffer stocks, said Mike Jones, director of global sourcing at Intertape Polymer Group, which makes tape for e-commerce companies.
"When the buying started, not only did China stop there, a lot of tire manufacturers came back and bought rubber," said Jones. "The supply of rubber in the USA became very scarce."
This can be seen in the price of rubber futures. Natural rubber rose to around $ 2 a kilogram in late February, a four-year high before it recently saw a decline, according to Bloomberg data. Robert Meyer, former CEO of rubber giant Halcyon Agri Corp. Ltd., sees prices rise up to $ 5 over the next five years.
"The supply problems that we are now seeing are structural," said Meyer, now managing director of the venture firm Angsana Investments Private Ltd. in Singapore. "You're not going to change very soon."
According to Tor Hough, founder of supply chain research firm Elm Analytics, the situation reveals the dangers of just-in-time manufacturing processes that have been a gospel of the auto industry for decades. By keeping inventory levels low to control costs, companies are vulnerable in times of increased volatility in the supply chain. The semiconductor shortage, compounded by automakers' cut orders during the Covid-19 shutdown, could cause $ 61 billion in lost sales this year, according to consultancy AlixPartners.
China's recent rubber purchases highlighted an additional vulnerability for the US, which lacks a national stash to act as a safety net for domestic businesses, noted Dan Finkenstadt, a professor at the Naval Graduate School of Defense Management in Monterey, California. The US government could create its own inventory or provide loan guarantees to companies to fund their own additional supplies, he said.
"People have long believed that market demand and capitalism would always be there," he said. "This is not what happens in a natural emergency where everyone pulls at the same time."
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