High oil prices predicted to support natural rubber market in 2005.

Crude oil prices will most likely be the determinant of direction in the natural rubber market yet again in 2005, according to the Dow Jones Newswire.

With expensive crude oil keeping synthetic rubber prices high, tire manufacturers, the primary consumers of natural rubber, will be forced to use more and more of the latter in place of synthetic rubber, analysts and industry participants feel.

"If oil prices stay high, major international tire makers will switch to natural rubber," according to Viyavood Sincharoenkul, managing director of the Hat Yai-based Sri Trang Agro Industry PCL, one of the biggest rubber exporting companies in the world.

In mid-2004, supply-related concerns fueled a rally in crude oil prices, leading to a surge in synthetic rubber prices. Butadiene, a petroleum by-product, is the main raw material for producing synthetic rubber.

Synthetic rubber, which was trading around 155 U.S. cents a kilogram, cost and freight, delivered to Asian ports in August, rose to over 180 U.S. cents/kg, C&F, by November.

This gave an obvious advantage to natural rubber, which was then trading around 122-127 U.S. cents/kg, C&F, delivered to China for the benchmark Thai ribbed smoked sheet rubber 3 grade.

If such a wide price difference remains, it could boost the consumption and prices of natural rubber in 2005.

"In recent years, natural rubber's share in rubber consumption of major tire producing countries such as the U.S., Japan, Germany, France, the U.K. and Italy, has been increasing," said Prachaya Jumpasut, senior economist at the London-based International Rubber Study Group (IRSG).

"It will not be surprising if this trend continues for a few more years, because of the influence of (high) oil prices," he said.

IRSG has estimated natural rubber consumption at 8.14 million metric tons in 2004, up 2.3% on year, while that of synthetic rubber is estimated at 12.02 million tons, up 5.5%.

In 2005, however, Jumpasut expects natural rubber consumption to rise by 4.9%, while synthetic rubber consumption may register a lower 4.7% growth rate.

"The relatively sharp rise in the prices of synthetic rubber (compared) to natural rubber prices this year (2004), which has been caused by record-high oil prices, will help natural rubber consumption to grow at a slightly faster rate than that of synthetic rubber," he said.

Chinese tire manufacturers, who consume most of the natural rubber imported by the country, said they will use more natural rubber which is currently cheaper than synthetic rubber. China imports more than 1 million tons of natural rubber a year and overtook the U.S. a few years ago as the largest importer.

The price-sensitive Chinese tire makers are known to switch between the two raw materials more willingly than their overseas competitors, to take advantage of changing price trends.

A senior official at Triangle Group, one of the biggest tire makers in China, said his company has already reduced its monthly consumption of synthetic rubber and increased natural rubber intake after synthetic rubber prices rose.

The Triangle Group, based in the eastern province of Shandong, used to consume about 2,000 tons of synthetic rubber and 8,000 tons of natural rubber a month. In the fourth quarter of 2004, the group's monthly consumption of synthetic rubber slid to 1,500 tons, while natural rubber consumption rose to 10,000 tons. If prices rise further, the company said it will reduce the usage of synthetic rubber and buy more natural rubber.

According to an official in charge of rubber imports in China's Guizhou Tire, natural rubber can be used as a substitute for synthetic rubber. He expects Guizhou Tire, as well as other Chinese tire makers, to cut synthetic rubber consumption further if prices continue to remain high.

But the change may not happen overnight. A rubber exporter based in Kuala Lumpur said it will take time for tire manufacturers to revise a production mix that took them years to develop.

"It will take time. It's not practical (for) tire manufacturers (to) immediately change their formula," he said.

And even if tire makers do alter their production formula, it does not mean there will be a sharp reduction in the use of synthetic rubber.

"Natural rubber is flexible, but not durable. Tire makers will need synthetic rubber to make tires last longer," said Aziz Pane, chairman of the Indonesian Association of Tire Producers.

Tire makers are the world's biggest consumers of rubber, and typically use a 60% synthetic rubber, 40% natural rubber ratio in their production mix.

It is unclear if big tire makers, such as France's Michelin and U.S.-based Goodyear Tire & Rubber, will actually resort to substitution. Analysts say that big players may stick to their tried-and-tested production formula, especially if the huge price differential stays only for a few months.

However, if synthetic rubber were to trade at a hefty premium to natural rubber for a long period, it is likely that tire makers will alter their formula to be able to use more of the cheaper natural rubber, market participants said.