Published in the June 2011 Australia’s Mining Monthly

This is even as a new wave of commodities boom washes over.

The potential shortage comes at a time when the Australian resources industry is expecting a record $76 billion in investments, buoyed by a sharp upswing in global commodities prices.

“The shortage is a reality,” a tyre management industry executive said. “It’s a continuation of what was going on in 2005-06. Everything fell due to the GFC but now we’re going back to pre-GFC demand.”

Bridgestone Earthmover Tyres executive manager business planning Bruce Connor told Australia’s Mining Monthly that in terms of availability “we are not advised [by the board in Japan] that there is a shortage”.

“But we do have an excess demand situation,” he said.

“Raw materials are not affecting production, but we are limited by our production facility.”

High commodities prices are making mining companies revisit mothballed projects and undertake expansions. Oddly enough, this surge in prices is feeding into high raw material costs for tyre manufacturing too.

“The mining commodities have gone up and so has the price of natural rubber, oil and carbon black and that affects the pricing of tyres,” the industry source said.

The latest round of tyre shortages is not new.

The mining sector faced a more acute shortfall in 2005-06 after a period of quiet earlier in the decade.

As mining activity gathered momentum, demand for earthmover tyres increased.

With production capacity of the major manufacturers – including Michelin, Goodyear and Bridgestone – limited, ancillary industries including recycling and retreading emerged.

However, the boom was short-lived and as the global financial crisis took hold mining activity slowed down.

Much of the investment made in expanding tyre manufacturing capacity became stranded.

With mining activity picking up, the industry is facing yet another round of supply constraint.

This time around the availability is compounded by high raw material costs including natural rubber, oil, steel and prices of other chemicals.

According to industry experts, a typical off-the-road tyre is composed of 47% rubber, 22% carbon black and 12% metal.

The use of natural rubber for these tyres is as high as 80%, compared with 40% for light trucks.

This means the prices of OTR tyres are highly susceptible to fluctuations in the natural rubber market, which has been quite volatile in recent times.

Natural rubber prices in both the spot market as well as forward prices at the Tokyo Commodities Exchange have increased more than 90% in the past year.

Natural rubber futures prices at TOCOM were quoted at 544 yen per kilogram earlier this year compared with 338 yen/kg last year.

Similarly, physical prices for benchmark RSS3 Bangkok natural rubber traded at $US6.16/kg this April compared with $3.40/kg at the same time last year.

“TOCOM futures have increased and that has reflected in the physical markets in Southeast Asia,” Association of Natural Rubber Exporting Countries senior economist Jom Jacob told AMM.

Jacob notes that part of the reason prices have escalated is because of a serious under investment in rubber plantation.

“Late 1990s onwards until 2004 the rubber price was low due to the Asian financial crisis and at that time the investment was low,” Jacob said.

He added that since rubber plants took nearly seven years to start yielding, the industry was affected by low-yields as well as a lack of mature trees.

The existing trees were planted in the 1980s and the yields for those plants have fallen.

“There will be new trees attaining maturity at the end of this year or early next year because of high rate of planting from 2005 onwards,” Jacob said.

That investment was made at the height of the first tyre shortage.

Jacob pointed out that what has also exacerbated the problem is abnormal climate patterns.

“The climate has become unpredictable,” he said.

“In Malaysia it is supposed to be dry season and in Thailand also March is supposed to be dry season. But there was floods in southern Thailand. So harvesting couldn’t be done and tapping days have gone down.”

Along with Thailand, Malaysia and Indonesia account for almost 75% of the world’s rubber exports.

The shortages witnessed earlier this year also were seasonal and, according to Jacob, supply was expected to rebalance starting May.

Going forward, more supply is also likely to come onstream as the Thai government looks to bring in additional areas in the north under rubber cultivation, though the area there provides less yield.

However, the government measures are aimed at providing more socio-economic benefit to the region.

While prices are reflective of an imbalance in supply, Jacob said natural rubber prices were likely to soften in the next three to six months but warned the downside was capped as rubber prices were now inextricably linked to the broader commodities market.

“Because of low rates of interest there is capital flow from hedge funds from US to Asia Pacific region,” he said.

“This is influencing commodity prices and the boom is reflected in the price of natural rubber.”

The volatility in the natural rubber market is repeated in other commodities as well and the price of oil has had a huge impact on the costs of other raw material.

While higher iron ore prices have affected costs of steel, synthetic rubber and carbon black are petroleum derived and high oil prices escalate end product costs.

Carbon black is used mostly for treading the tyres and without carbon black the tyres will be slippery when wet

and also wear out quickly.

“Oil price will influence synthetic rubber and carbon black, but it’s a secondary influence,” Connor said.

“Carbon black and synthetic rubber don’t necessarily follow oil pricing though derived from it.”

However, he added that while raw material costs had influenced the pricing of the tyres, it was usually passed on to the consumers and would have marginal, if any, impact on overall demand.

“The major cost movement has been in natural rubber and the largest component of OTR tyres are steel and natural rubber,” Connor said, adding that natural rubber availability was not an issue.

What is a constraint though is the availability of production facilities.

Large OTR tyres take up a lot of manufacturing real estate.

Connor noted that Bridgestone had already commenced the second stage of production at its Kitakyushu plant in Japan and was undertaking the third phase expansion under which production was expected to start in January 2013.

Once the expansion is completed by the end of 2013, the capacity is expected to increase to 130 tonnes per day.

The Kitakyushu plant was commissioned in 2009, and is dedicated to producing large OTR trucks with bead diameters of 57 inches and 63 inches.

Connor said that plant was “producing just enough to meet allocations” with almost all the capacity already contracted.

But while most major tyre companies have committed to expansion, there is still some wariness regarding the strength of economic revival.

“There is still uncertainty,” the tyre industry source said.

“Goodyear expanded earlier but have been bitten, so unless there is confidence in a longer term growth, investments will be limited. Though longer-term trend points to a growth, if inflation is high in China and there are hiccups, there could be blips in mining sector.”

It is a sentiment that most other industry sources concur with.

Connor noted that returns on investments had to be considered and typically for OTR tyres, the return on capital was over a substantially longer period compared to passenger tyres.

But whatever the economic considerations of setting up a plant or expanding capacity, production is set to increase in themedium term and demand likely to remain strong.