Oversupply plagues world E-SBR producers; solution could mean plant rationalization. (Viewpoint).

Because an oversupply of emulsion (E-SBR) is flooding world markets, its producers face a daunting task of survival. How they face the challenge will determine who survives. How they found themselves in this perilous oversupply position is most interesting. How they hope to work themselves out of it is even more so.

While the synthetic rubber (SR) industry has long considered itself a global enterprise, individual producers have continued to operate as if it were still the 1950s when the bulk of their business was domestic. The SR industry was founded during World War II. After the war ended, the industry converted into a cold war operating model. Military and domestic economies boomed and the demand for SR escalated. In the 1950s and 1960s, the use, and therefore the production capacity, grew by double digits. Domestic producers around the globe were challenged to keep up with the demand. But now the cold war is over, the industry is global, demand has plummeted, and E-SBR producers face the challenge of oversupply.

First, let's look at the problem geographically. In the U.S. today, E-SBR operates at around 56% of nameplate capacity. Domestic demand tell more than 15% in 2001, and more than 26% over five years. Global demand declined by 11% in 2001 and by 18% when compared to 1999. Exports have dropped over 70% when compared to the early 1990s. Feedstock and energy prices in 2000 and 2001 increased dramatically, but have now returned to historically normal levels. Add to all of that a strong dollar, thereby limiting export opportunities, leaves U.S. producers with no easy solutions.

In Europe, the economy remained strong during the economic contraction in the early 90s. North American producers were therefore able to export product to Europe. Also, imports from North America were required to meet European demand. The end of the cold war brought radical changes to Europe.

In addition to some European tire production moving into Central Europe, Central European SR became part of the supply for all of Europe, and North American product was no longer needed to meet demand there. Pan European E-SBR capacity today is also in oversupply.

Currencies have also played a role. All European currencies have fallen in comparison to the U.S. dollar. Since its introduction, the value of the Euro has fallen by 25%. The Polish Zloty and the Czech Koruna have dropped even more dramatically.

In Asia, new plants were built in Korea, Thailand, Indonesia and China in the 90s. The plants were built on the assumption that the economies of the ASEAN countries were going to continue their phenomenal growth. You may recall that some of these countries were even described, economically, as Asian Tigers. Then the Asian crisis struck, halting the remarkable growth. In the case of Indonesia, its political situation destabilized and its economy has continued to deteriorate.

Meanwhile, the Asian SR industry has added over 300 kt. of new capacity, while demand has fallen. The strong dollar has dramatically impacted the competitiveness of the North American product, and the value of all Asian currencies has fallen on the average of 40%. In the case of Indonesia and Thailand, which have added 120 kt of additional capacity, Indonesia's rupiah has decreased in value by 76%, and Thailand's baht has dropped by 41%. Even considering transportation costs, this situation clearly impacts the competitiveness of North American SR producers.

Meanwhile, the price of natural rubber (NR) has fallen. This is in part due to currency de-valuation, but also due to oversupply. The NR supply situation is improving somewhat, but if SR producers are looking for NR to solve the problem, they will be waiting for some time. So, where is the E-SBR industry headed? Clearly, protectionism won't solve the problem. Protectionism only buys time for the inefficient parts of industry to keep on being inefficient. An economic recovery would help, but even if demand returns to recent historic highs, capacity would far exceed demand. The obvious answer: Rationalization. Every region of the world has oversupply. The free market system rewards efficiency.

Britt D. Theismann is director of statistical information for the International Institute of Synthetic Rubber Producers (IISRP) in Houston, Texas. He has been with the IISRP for over 12 years, where he designed and implemented global, regional and product-specific statistical programs for the synthetic rubber industry. He is editor and publisher of the IISRP's publication Worldwide Rubber Statistics.