The Inflexibility of Rubber

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News of commodity declines fill our television screens and Internet sites on a daily basis. We've become familiar with precipitous drops in value, particularly involving fossil fuel energy, as global supply begins to outweigh demand. One of the largest crashes in commodities today doesn't involve petroleum or shiny metal, however, but a sticky white sap collected from tapping trees. Over the past four years, we have seen rubber fall by huge amounts, peaking in 2011 at around $2 per pound and today trading for around 74 cents per pound. Such a drop seems to go against the grain of common sense: the global market has churned out more vehicles each year despite recessions and financial crisis. Each of the 65 million cars produced annually needs at least four tires made of around 10 pounds of rubber. Yet the price tag tells the tale far better than any narrative: rubber has hit four-year lows and does not appear poised for a rebound.

Rubber Barons and the First Elastic Boom

It's odd to think of rubber as an agricultural product, even if its harvested in a similar fashion to maple syrup. Most rubber comes from a single species of tree grown throughout the tropics, a species colloquially known as the rubber tree. Originally grown in the Brazilian rainforest, rubber trees led to the modernization of Brazil during the 19th century as major tracts of previously uninhabited land gave way to rubber plantations. The industrial revolution provided a sure market for rubber in everything from suspenders to tires, resulting in 10,000 tons of rubber produced each year in South America. Workers at the bottom got little, but the rubber barons who controlled massive swaths of land became the nouveau riche in Brazil, controlling politics and driving culture. The boom ended around World War One, as competition in southeast Asia made Brazilian plantations shift to sugar for better profit. Today, most rubber produced comes from Thailand, Malaysia, and Indonesia, where rainforest conditions facilitate growth while labor comes cheaply. These three nations form the Tripartite Rubber Council and enjoy the ability to control prices with treaties and agreements on annual production.

Ailing Autos

No other industry relies on rubber quite like automobiles. Fifty percent of all rubber tapped in the world will end up in a car tire. If the car market continues to grow steadily, why does the rubber market not follow suit? Several answers make the picture more clear, first and foremost involving recycling. The famous "tire mountains" that clogged up dumps for the past century are by and large gone thanks to aggressive rubber recycling that puts 90% of all tire materials back into use. Additionally, tires no longer rely on a large amount of rubber. Low profile tires have become all the rage thanks to their light weight and durability, provided that they don't need to go over a snowbank or up the side of a hill. New technology has put the rubber market in a pinch, where more and more demand can be met with existing supply.

Surge and Decline

Like nearly every other commodity slowdown, the finger of blame may be pointed squarely at China. 10% economic growth per year seems to be a phenomenon that's well in the rear-view mirror of the nation. Chinese construction and manufacturing have slowed in the past four years as the yuan has become devalued against the dollar and Euro, leading to increasing consumption of domestic materials rather than the fierce demand for imports. A growing Chinese auto market hasn't given rubber the swing it needs to enjoy profitability. China imports the bulk of the $30 billion of rubber produced annually from its southern neighbors and hasn't been afraid to play the markets to their advantage. In December of 2014, the Chinese imported a surging 350,000 tons of rubber, 67% more than in the previous year, thanks to depressed prices and the leverage of Thailand removing an import tax in order to drum up better sales. At the current price, many nations have began to cross over the break-even point of rubber, estimated to be around 90 cents per pound.

Price Controls

The International Rubber Consortium, an organization philosophically similar to OPEC, brings together seven nations that account for two-thirds of all rubber production in the world. The Consortium is by no means pleased with the large drop in rubber, but has yet to take decisive action in order to stop the bleeding. Chief Executive Officer Yium Tavarolit has repeatedly told economists, investors, and politicians that the Consortium wants to take the approach of waiting for the market to correct itself rather than prop up any safeguards. It's a strategy similar to Saudi Arabia's wait-it-out policy regarding the low price of oil, meant to keep the industry from relying on a temporary bubble. Since rubber manufacturing requires large of oil, furthermore, the bouncy commodity tends to follow the sticky commodity, the latter of which has had a particularly rough year. Tavarolit believes the decline of the oil market has shaken the nerve of commodities investors more broadly, who have chosen to look for more sure investments than rubber to recuperate.

Can Rubber Bounce Back?

Some factors indicate that the worst of rubber's woes may be past. Meteorologists predict that we'll see an El Nino weather pattern this year, resulting in drier growing conditions and less supply. Since rubber trees are thirsty, output will slow come the summertime, which has historically seen rubber prices rise, even if only temporarily. That'll make the commodity rise in the short term, even if the rise almost certainly won't offset four years of declining prices. If hitching your financial wagon to a weather prediction seems less than palatable, try investing in tire companies that are riding low rubber prices to great success. Cooper Tire and Rubber (CTB, trading for $41.93 on the NYSE) has enjoyed 12% growth in 2015 alone thanks to the depressed prices of rubber.

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