And most market experts say the trend will continue for the short-term, as some grades of synthetic rubber are in short supply, mostly due to feedstock shortages.

In the early months of 2008, prices of natural rubber on U.S., Singapore and Western Europe commodity exchanges hovered in the $1.15–$1.25/lb range, some 25–30% more than a year earlier. By contrast, as recently as 2005, prices were between 50–60¢/lb.

According to Whitney Luckett, vice president for sales and marketing at the Norfolk, Va.-based rubber trading firm RCMA Americas, the run-up in natural rubber prices is due to several factors, including the surge in crude oil, and, to a lesser extent, the drop of the U.S. dollar against foreign currencies. (Rising crude oil has also elevated synthetic rubber tags, which are closely linked to natural rubber prices.) Bad weather at Southeast Asian rubber plantations has impacted long-term supply and boosted rubber prices, but Luckett says the overall impact of this factor "is not big." A more important cause for the rise in natural rubber, notes Luckett, is the seemingly insatiable demand for it in the booming economies of China and India.

"Just look at the Chinese auto industry," she says. "The growth there is just mind boggling." Buyers can expect the upward trend in natural rubber to continue for at least another 18 months or so, says Luckett, with prices propelled by higher oil and heavy Asian demand.

Meanwhile, prices of synthetic rubber have leaped ahead by roughly the same magnitude as natural rubber. While more expensive crude oil is part of the reason, other factors are in play. Butadiene, a key synthetic rubber feedstock, has gone short in the last few months. Butadiene is mostly produced as a co-product of steam cracking processes that produce ethylene and other olefins. Recently, "we’ve seen a strong move" in North America toward ethane-based ethylene production which produces less butadiene, says Bill Hyde, an analyst with Houston-based Chemical Market Associates Inc. (CMAI).

Ethylene cracker operating rates in Asia have been on the downswing due to high feedstock costs, leaving less butadiene available for export. The net result is that there is not enough butadiene to go around in North America. The shortage has caused record-high prices of butadiene, says Hyde. According to Purchasingdata.com, butadiene prices jumped 7¢ to 65¢/lb for March, and another 11¢ to 76¢/lb in April, 36% higher than a year ago.

The rising feedstock costs have created upward pressure on prices for synthetic rubber, particularly styrene-butadiene rubber (SBR). And because butadiene is tight, says Hyde, many synthetic rubber producers "are not able to run their plants at the rates they would like to." As a result, he adds, synthetic rubber has become tight, and some buyers are on allocation. Hyde estimates the constricted supplies of synthetic rubber in the U.S. will last for "several more months."

Smaller companies are less able to pass along their increased rubber costs to their customers. Recent price hikes for natural and synthetic rubber have been "horrendous," says Larry Hecht, president of Hecht Rubber Corp., a Jacksonville, Fla. fabricator of rubber products. The situation, "is the worst I’ve seen in 30 years" says Hecht, who does the company’s buying and supplier management.

Hecht has adopted several strategies to mitigate the firm’s increased rubber costs. Sometimes he substitutes one form of rubber in his products with a lower-cost grade, with no loss of quality. But this is not always possible, he says. He also routinely buys rubber in bulk to save money and has cautiously raised some prices to his customers, but concedes that he hasn’t been able to recoup all his increased costs.

Larger firms have a little more latitude in responding to the recent rubber price shocks. They can quickly pass along higher costs to their customers, as Goodyear Tire & Rubber, Bridgestone/Firestone, Cooper Tire & Rubber and Michelin have done in recent months. Internally, they can also rein in raw materials costs by focusing on streamlining their supply chain for reduced costs.

Goodyear, one of the world’s largest buyers of rubber, has one such program. According to Mark Purtilar, vice president and chief procurement officer for Akron, Ohio-based Goodyear, the effort, while not a direct response to the run-up in rubber prices, Goodyear’s Advantaged Supply Chain program has helped cushion the impact of prices. The program is a streamlined ordering and tracking process for inventories. As Purtilar explains it, the system can follow in real time the progress of a natural rubber shipment from its purchase in Asia, across the ocean by ship to its final delivery to a processing plant anywhere in the world. The Advantaged Supply Chain initiative also covers Goodyear’s purchasing joint venture with Japanese tiremaker Sumitomo Rubber Industries.

"It enables us to see, for example, where we have excesses, so that we don’t have to build massive inventories in any one area," says Purtilar. It then becomes easier to resolve these inventory bulges and cut costs. The system also uses a vendor-managed inventory platform.

Like other large tire companies, Goodyear constantly changes the ratios of natural to synthetic rubber it uses, depending on the relative economics of the two materials. This allows "maximum flexibility" in purchasing, says Purtilar.

Goodyear also works with its rubber suppliers to improve the quality of the material it receives, and to develop more efficient ways of processing the rubber. Though the payouts may not be immediate, both are key cost saving opportunities for the company, says Purtilar. (Tire Review/Akron)