Natural rubber prices hit all-time high.

That’s been a common headline throughout the past month, as NR prices have climbed well past the $5-per-kilogram mark—to $6.05 in Tokyo on Feb. 7. With NR supply short and demand high, they show every sign of going higher.

The cause—a perfect storm in the NR world, a combination of soaring demand, weather woes, currency fluctuations and the slow pace of replanting and maturation of the Hevea brasiliensis tree.

NR prices have rocketed upward on various commodity exchanges. On the Singapore Commodity Exchange, Rubber Smoked Sheets 3 reached $5.70 per kilo for March delivery in Singapore Jan. 20, while Technically Specified Rubber 20 rose to $5.47 per kilogram.

Standard Indonesian Rubber 20, the natural rubber grade used most often by U.S. tire manufacturers, stood at $2.51 per pound at the port of origin Jan. 20, a full 10 cents higher than just eight days before.

At the same time, prices of styrene-butadiene rubber, the most commonly used synthetic rubber, haven’t matched the NR increases. But like NR and butadiene, SBR prices have risen.

SBR prices increased some $600 per metric ton to $3,000-$3,100 between early October and January, according to ICIS, an online chemical and synthetic rubber information service.

The NR situation

There is no real end in sight for skyrocketing NR prices, according to various participants in the field.

“It’s not going to get any better,” said a source close to the NR industry who asked to remain anonymous. “It’s just an ugly world out there, and I see shortages developing.”

The Association of Natural Rubber Producing Countries, a Southeast Asian group whose members account for more than 90 percent of world NR production, projected in November that world NR supply would fall 3.8 percent in the fourth quarter of 2010.

Major supply increases from Indonesia did not make up for a massive production shortfall in Thailand caused by heavy rains and flooding in the fall of 2010, the ANRPC said in the latest edition of its newsletter, Natural Rubber Trends & Statistics.

The Rubber Research Institute of Thai- land estimated that about 45,000 acres of Hevea trees had been flooded and another 39,000 acres damaged by heavy winds, the ANRPC said.

This caused not only short-term supply issues because of harvest disruptions, but also long-term problems because of tree damage that could reduce Thailand’s NR production by 30,000 metric tons annually, the association said.

Meanwhile, NR imports into China were expected to increase 21 percent during that quarter.

High prices and low supply in the NR market seem likely to continue for some time, according to the Rubber Economist Ltd., a rubber economics website with offices in Bangkok and London.

“The fact that short-term factors such as currency movements and weather can cause such a sharp increase or decrease in rubber prices points to a serious tightness in the market,” a spokes-man for the Rubber Economist said in an e-mail.

“In the long term, there is a general belief that there will be a structural surplus for many commodities, but not for NR,” the spokesman said. Rapid growth in Asia is more than making up for saturation of demand in the West, it said, while increasing production costs will influence NR-producing countries to slow down their replanting and harvesting efforts.

The SBR situation

SBR pricing is determined essentially by two factors, according to experts: vehicle demand and butadiene prices. NR prices, because NR and SBR are both such important raw materials in tire and rubber product manufacturing, also play a role in determining SBR prices.

Butadiene prices have been in a rare situation in the last few months, according to Gene Lockard, a senior editor/ manager at ICIS.

Every month, the four major producers of butadiene make nominations for the price of butadiene, Lockard said. The lowest nomination is the price for that month.

However, recently one or more producers have been unwilling to settle on the lowest nominated price, creating price increases.

Butadiene prices are the main factor in contract prices for SBR 1502 and 1712, the most common grades, according to Lockard. Spot prices, on the other hand, are tied mostly to demand.

“With new car sales flatter than a pancake for 2009, and only the Cash for Clunkers program creating temporary relief, SBR producers wound down capacity,” he said. In 2009, SBR facilities ran at an average of 65- to 75-percent capacity, he said.

But original equipment and replacement tire demand is growing again, creating what Lockard called a “mild to moderate” demand for SBR.

The enormous increases in NR prices are motivating tire and rubber product makers to minimize their use of NR in favor of synthetic rubber, according to Lockard. But this is not unmitigated good news for SBR producers.

“SBR producers are between a rock and a hard place,” he said.

“It doesn’t pay to be too aggressive in raising prices, or you might chase away customers.”

What rubber manufacturers are doing - pyrolysis the solution

Balancing rubber product formulations to mitigate raw material cost increases is a delicate issue—so delicate, in fact, that few rubber product manufacturers are willing to talk about it, except in the most general terms.

“How can we find cheaper raw materials and make the same products?” said a spokesman for one manufacturer. “Where is that not a possibility? One of the challenges in a situation like this is going up to the customer and saying, ‘We can’t stay in business if we keep selling at the same price.’ ”

In announcing their earnings, some rubber product manufacturers are frank about the effect of high raw materials costs. Continental A.G., for example, announced that record-high raw materials costs in 2010 cost the company an additional $625 million for the year.

“We hope that prices for natural rubber will return to more reasonable levels once weather conditions have calmed down and the winter season in the major production countries has come to an end,” said a Continental spokeswoman in Hanover, Germany.

Conti’s reaction to higher raw materials costs has been to raise prices, though these increases have only partially offset the higher costs, the spokeswoman said. Those price increases—8.5 percent in NAFTA countries and 7 percent in Europe—have already been announced, she said.

“To compensate for the climbing raw material costs—especially natural rubber—we will probably have to initiate further substantial price increases. The success of such a measure will depend on how the prices for natural rubber develop in the future.”

Some companies have taken sweeping measures to minimize raw materials costs. A spokeswoman for Freudenberg-NOK L.P., for example, said her company switched to mostly SR five or six years ago, so NR price increases have had little effect on it. Higher SR prices also have not been a major factor for Freudenberg, she said