Natural Rubber Demand From Tiremakers Seen Staying Strong - Tire Review Magazine

Natural Rubber Demand From Tiremakers Seen Staying Strong

(Akron/Tire Review – CBS MarketWatch) Demand for natural rubber from major tiremakers is likely to remain healthy in the coming months, despite recent bearish signals from the tire industry, traders said June 28.

Strong demand for tires in Asia should offset the current weakening in the U.S., as should the production expansion underway in emerging economies, said a trader at a Japanese trading house.

"The demand side picture is still very positive, although in the U.S., it might not be as rosy," he said.

Natural rubber prices have shot up dramatically in the last six months on the back of rising demand and a weather-related shortfall in production, with many physical traders reporting prices had become too high for consumers.

Tuesday, Bridgestone Corp. lowered its profit forecast for 2006 by 35% to Y65 billion, blaming higher natural rubber and oil prices, as well as losses to a tire factory shutdown in the U.S.

Another tiremaker, Cooper Tire, announced it was shutting down four factories for two weeks to reduce inventories, citing weakening demand in the North American market.

The head of a hedge fund manager in Singapore said Cooper Tire’s announcement might indicate some slight weakening in the market, because of its slimmer profit margins than the big tiremakers.

"(Cooper Tire) has been the classic mid-size no-frills producer that’s stolen market share from Bridgestone and Michelin by aggressive pricing," he said.

Since Cooper Tire doesn’t hedge in futures markets, they have likely felt the runup in natural rubber prices more than the tire majors who do hedge, he said.

And, if demand for tires is weakening, either because of recent tire price hikes or slowing economic growth, "then it’ll be a decision between making less tires or losing more money," he said. "(It’s) potentially a weakening signal."

However, he added that the rubber market remains robust, with "quite heavy Chinese offtake of SIR20" and high prices for Thai ribbed smoke 3 sheets.

"Fundamentally, it’s still quite strong. The market’s got its eye on what’s happening now, which is quite tight."

Rubber futures on the Tokyo Commodity Exchange, the trendsetter for the paper market, are sharply backdated.

The spot month July RSS3 contract ended Wednesday at Y318.7 a kilogram, Y12.2 above the benchmark December contract, though the spread has narrowed in the past week.

The Singapore-based trader said Bridgestone’s announcement is likely an admission that they underestimated the rise in raw material costs, especially that of natural rubber, but it’s unlikely they’ll reduce production as a result.

"Demand will not reduce, even with the closure of plants in North America," he said.

Bridgestone, as well as other big tiremakers, are adding capacity with new factories in Asia and Eastern Europe, and these factories have to run at full capacity for these investments to pay for themselves.

"The capacity for tires is more than in previous years, and all these factories have to run at optimal levels. Otherwise, they’ll actually lose money," he said.

"(Rubber) is still slightly bullish because that will be replaced by bigger and newer plants."

And, while profit earnings at Bridgestone and Michelin may fall this year, the big tiremakers will still be in the black, he added.

"Even despite all this fourfold, fivefold increase in rubber, they’ll still be making money, it just means they’ll be making less."

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