IRSG says elastomer recovery under way.

The recovery in the world elastomer industry really got under way in 1994, according to the International Rubber Study Group's 1994 retrospect and 1995 outlook report. The following is that report.

The overall growth in the rubber industry contrasted with the sharp falls in consumption and production in 1993 as economic recoveries synchronized. There were increases in elastomer consumption in most major countries. Preliminary estimates show that consumption growth rate lagged behind that of production and total elastomer stocks fell to the lowest level since 1976. The NR sector grew more quickly relative to SR, and as a result the proportion of SR in total elastomer consumption fell for the eighth consecutive year.

Last year saw the first rise in SR production for six years, and the first reasonable growth rate in SR consumption for five years, with production and consumption The excess of consumption over production, which has existed since 1991, resulted in SR stocks falling to the lowest level since 1974.

NR consumption increased in 1994 for the third year in a row. NR production, which fell sharply in 1993, increased again in 1994. Asian countries were among those showing sharp increases in NR consumption. Smaller producing countries in Africa and Asia showed sharp increases in production. Output in the major producers is also estimated to have increased showing their responsiveness to rubber prices. The ratio of NR stocks to consumption continued to decline.

NR prices increased sharply in 1994. Although the increases were anticipated by many observers, the extent of the increase, particularly after four years of very stable prices, caught everyone by surprise. As during the last two years, the strongest prices were in TSR compared with RSS. Last year also saw a sharp fluctuation in price differentials between rubber grades. Futures trading increased sharply at both TOCOM (Tokyo Commodity Exchange) and KRE (Kobe Rubber Exchange), but only a slightly at SICOM Singapore Commodity Exchange).

INRO stocks were thought to be more than 220,000 metric tons at the beginning of the year. In July, the Buffer Stock Manager came into the market as a seller for the first time since 1989. By the third week of September, all of the stocks were sold. Different factors, e.g. INRO activities, weather, speculation, defaults on contracts, improving physical demand, sharp reduction in supplies of polyisoprene and other SR from Russia, etc, seemed to dominate rubber price movements at different times during the year.

Although SR prices declined in 1990-91 and rose in 1991-92, while NR prices remained quite stable, NR has shown relatively sharper price movements during the past two years. SR producers raised their prices as many as six times during 1994 because of increasing raw material and operating costs. The factors influencing feedstock and SR prices related to planned and unplanned plant closures in the USA, Europe and the Far East. At the beginning of the year, SR capacity utilization was reported as under 51)%. By the end of the year, reports were of a shortage in SR

Last year the world economy turned out to be better than predicted. Virtually all the major world tire manufacturers returned to profit in 1994. Improvements in profits and sales have also been reported by many chemical companies. The U.S. economy performed better in 1994 than for quite some time. In Europe, the economy recovered faster than expected. Western European chemical production was forecast to increase by 1.5%, but turned out to have increased by more than 5%. Western Europe car sales increased by 5.9% in 1994, reversing the steepest decline in the post-war period of

In most countries of central and eastern Europe, stabilization and liberalization were largely completed. The aggregate economic activity of central Europe seems to have passed the turning point and output is rising. However, the picture for the Russian Federation is not as bright, as its industrial output has fallen to less than half in just three years. In Asia, Japanese industrial production is estimated to have risen slight]y and vehicle sales increased, but vehicle production showed the fourth successive annual decline. Growth for other Asian countries continued to be quite impressive in 1994, but the growth of the Chinese car industry slowed sharply.

The outlook for the industrialized world is brighter than at any time in recent years. All of OECD member countries are now out of recession and expected to show growth during the next two years. The elastomer industry in central and eastern Europe should continue its recovery. Growth is expected to continue in Asia.

Both the NR and SR markets look likely to continue to be tight this year. There is concern about shortages of natural rubber in the future as producing countries, particularly in Southeast Asia, become increasingly industrialized. Chinese NR output is expected to show little change in 1995, leading to a shortage and increased imports. However, in recent years much of the Chinese rubber shortages have come from increases in local SR consumption. Privatization and liberalization in Russia and India will also impact on rubber markets. The setback in Russian SR production can be a positive factor for NR. In the short run, however, weather still is an important facto], as is the fact that INRO buffer stocks are now exhausted.

For SR, experts expect butadiene to remain tight for this year. SR demand should be strong, influenced by economic recovery and efforts to substitute NR, and SR prices should remain firm. However, the possibility of substitution in the present state of tight SR supply is less of a threat.

Prior to the Kobe earthquake, the Japanese economy looked to be on its way to recovery. We believe that there are more positive than negative factors affecting the Japanese and world economies. Both NR and SR will benefit from these economic improvements. Whatever the other prospects, the future of INRA will be important for consumers and producers. The renegotiation began again in February and a review of the current reference price is due in August. The question of the reference price is still affecting the renegotiation. To prevent an automatic upward revision in August, the DMIP would need to fall by an average of 1.4 M/S cents/kg every day to reach 101.8 M/S cents/kg, i.e. some 48 M/S cents/kg below the floor price. It is therefore certain that the INRA Il reference price will be at least 206.7 M/S cents/kg when the agreement expires in December 1995. This may well influence the attitudes of both exporters and importers in Geneva.