The past two years wreaked havoc on supply chains as the world witnessed disruptive events ranging from the COVID-19 pandemic to the Russian invasion of Ukraine. Given the current situation, the disruptions are unlikely to subside anytime soon. Thus, it is high time the organizations revamp their supply chain strategies and move towards resiliency and flexibility to adapt to drastic events.
So, on this episode of Helixtapping the industry, we speak to Farah Miller, CEO, and co-founder of HelixtapTechnologies, and Alvin Chew, Director, Data and Business Development of Helixtap Technologies. Today we will be talking about the current situation of the supply chain and the impact of ongoing geopolitical conflicts.
It’s Monday, 28th of March 2022.
Arusha – Hi Farah, Hi Alvin, welcome to Helixtaping the industry.
Farah – Thanks, Arusha.
Alvin – Thanks, Arusha.
Arusha – So a lot has been happening when we talk about the supply chain. Until now supply chains have existed in a largely unconstrained environment and now with a series of events from the pandemic to the Russian invasion of Ukraine has constrained the environment. Farah, how is all that impacting the overall rubber industry
Farah – Russia is not a major producer of natural rubber. However they are connected to the global supply chain and when they are forcibly removed from the economy via sanctions, they look for means to protect themselves. As the “breadbasket” of the world, Russia produces 15% of wheat globally and is a key producer in oil and its downstream products from natural gas, fertilizers (which require Nitrogen), and in the automotive industry carbon black (which they are one of the biggest producers of globally) and synthetic rubber.
The market has priced in a potential peace deal. However, balked by the bottlenecks in the transportation and procurement of raw materials, such as some tire plant closures in Eastern European regions, but it is the uncertainty of the situation that rattles markets the most. On the pricing front, rubber hasn’t seen the major 4-5x spike in prices unlike some of the commodities such as Nickel, Phosphorous, and Natural gas. Looking at our rubber physical prices assessment, on Feb 24, all prices took a sharp drop, from 1,850 USD/MT on average to 1,800 USD/MT. However, there is a support level being reached and that is more a function of supply-side (isolated from Russia) and wintering in ASEAN and African countries.
The most obvious impact on rubber was some tire manufacturers could not buy (carbon black and other raw materials) directly from Russia and had to use Indian and Chinese suppliers as an intermediary. Otherwise, port closures and restrictions meant demurrage for traders and cargo being stuck in the commotion. Given the tire majors have rubber manufacturing plants in Eastern Europe, there is potentially the opposite effect (lower prices due to lower demand) as long as there is no peace in that region.
Arusha – This is interesting because unlike other commodities, Russia’s limited presence in teh natural rubber market had quite an opposite impact on it. However, if we have an eagle eye view, that is to say, the overall global economy, Alvin, what are your thoughts on this continued supply chain disruption that we are seeing?
Alvin – Through the course of the pandemic, demand has largely shifted from physical services to online which has outstripped the market’s capacity to produce or ship. Thus, putting great strains on the capacity of supply chains to deliver as it created more demand than the delivery carriers can accommodate, stretching their ability to load to containers and labor shortages across industries.
Furthermore, these ongoing supply chain disruptions have led to higher inflation within the global economy which is affecting the monetary policies of most central banks in the world in the form of heightened rates. This in turn is affecting GDP growth and subsequently rubber demand as a whole.
Over the past 40 years, inflation has largely been a demand-driven development but this time around its constraints are connected to the supply chain. The consensus is that a higher inflationary environment will likely remain in 2022, and even stretch to 2023. Inflation would act as a drag on economic growth.
IMF, downgraded its GDP growth forecast for 2022, in January from its October 2021 outlook. This suggests they see even greater headwinds ahead for the economy in 2022 and mind you this was before the Russia and Ukraine war, which would now put even more pressure on GDP growth and the inflationary momentum.
I agree with Farah, Russia not being a rubber producer does not have a direct impact on the industry but it would contribute to higher global inflationary pressure. Russia supplies around 40% of palladium used in the global production of semiconductors while Ukraine supplies about 70% of neon – in short, the price of chips will increase
Another point is Russia is a key producer and exporter of fertilizers in the world. Fertilizer prices last week were nearly 40% higher than a month ago, that is before the invasion started, as per Green Markets North America Fertilizer Price Index.
All of this would first impact inflation and global GDP growth and subsequently affect the outlook for rubber demand and prices in the next two years.
Arusha – So clearly if not a direct impact, there surely would be a ripple effect on the Rubber industry. Now there is another vital factor and one that is closely associated with the supply chain is – oil. With sanctions, oil price volatility, Alvin, how do you see this impacting the rubber industry to be specific? Here I would like to add that some markets reliant on Russian oil have found sources of replacement, which I believe is most likely a short-term situation.
Alvin – I believe the oil market remains uncertain.
Russia exports more than 7 million barrels of crude oil and other petroleum products a day and is globally the third-largest oil producer. Now the interesting part is 4.8 million barrels of this are exported to countries backing the sanctions against Russia. Only a few countries like Saudi Arabia, UAE, Iran, US, and Venezuela have the ability to boost their production to replace Russian oil cut off by sanctions.
A peace deal between Russia and Ukraine, or the chances of having Iranian or Venezuelan oil supply added back to the market or easing of demand for oil as economic activity slows might cap the rally in oil prices. However, if or when these factors would come into play is something we need to wait and watch.
Our analysis suggests that statistically from 2015 to 2022, when oil prices moved upwards on a monthly basis, more than 65% of the time, rubber prices will also move upwards in tandem.
However, if we analyze the rubber price premium over crude, the analysis suggests that current rubber prices might be overpriced relative to crude prices in the market. If we look at how Rubber prices have performed during this invasion, Helixtap physical rubber assessment of SIR20, STR20 and AFR10 have all trended downwards by 30-50/t since the invasion started, despite how oil price trended upwards. Moreover, a possible drop in global vehicle miles due to higher fuel cost, is also likely to weigh on rubber demand and subsequently prices in the near term.
Arusha – Well, this might not sound very optimistic. But volatility in oil prices especially when it is northbound, freight rates easclates too. Farah, has volatile freight rates been affecting rubber prices or the volume movement?
Farah – During COVID the joke in the market has been that buyers were paying the same or if not more for freight than the rubber they needed to manufacture tires and other finished goods. The freight rates and supply chain issues look to remain until 2023.
I would say higher freight rates tend to put pressure on the physical commodities as most buyers would typically need to calculate on a landed cost (final destination). However, you can’t fight the supply-demand fundamentals and should not look at freight as an indicator for rubber price movement.
Freight does not impact volume either. The only impact would be on sourcing areas. For example, African rubber raw material and cup lump flow to Malaysia and Thailand has ceased – that arbitrage window did not make sense with high freight rates. What could be interesting is the peripheral producing countries, such as South America due to proximity to the US, could have seen some higher export volume. However, given most tire manufacturers have specific factory lists, we have seen them sticking to what they know and solving this by chartering entire vessels or trains rather than changing the factory sources.
Arusha – This is interesting. I mean even though a hike in freight might not be a concern for the producers directly but that might propel some of the end users to look for alternative markets, like you said US buyers might look at South America. That brings my focus on what is the situation on the production side. With so much uncertainty at play, Farah, what according to you is the major pain point for the producers and how is this impacting their cash flow?
Farah – The uncertainty just means higher volatility – which makes it harder for them to plan outputs which link to planning and timing raw material purchases. Usually, cash flow issues could stem from 2 major reasons for the producers:
Firstly, systematic reduction in banks and financial institutions in financing commodity companies – rubber is no exception. Some traders have been burnt by “shadow financing” or “tolling agreements”.
secondly, is the supply chain issues – with the long waiting queues in ports and foreign currency restrictions in some countries like Sri Lanka which flows down to the producers eventually. This is because most consumers buy on credit terms which can mean 3 months from sale normally.
Arusha – Well, given so much is happening lately, I believe it’s vital that the companies should work to build resilience. Alvin, what do you think. Do you feel data and analytics can help mitigate supply chain disruptions and the related setbacks?
Alvin – To be honest, I doubt data and analytics could help ease the supply chain disruptions we are all facing in a major way. But, having said that, insights from relevant data and analytics, surely can provide more clarity, especially in three aspects.
The first is Market insights would give the industry a better understanding of current geopolitical effects to make informed decisions. For example, since Russia invaded Ukraine, the information I believe one would be looking for is how an increase in crude oil prices would affect rubber prices or producers, or the impact of sanctions.
Secondly, an accurate, representative physical benchmark price is crucial. The more uncertain the market is, the more data and insights are needed to navigate through it. In this case, it might get more challenging to decide what the suitable premium over the SICOM price should be to get closer to the physical rubber price.
Thirdly, is forecasts or predictive prices allowing users to understand from a mathematical and statistical perspective how the rubber market will behave in the week ahead – allowing users to plan their spot trade accordingly. Helixtap launched the world’s first daily rubber price forecast wherein we forecast physical and futures rubber prices for the week ahead, providing forward price visibility for the global rubber market. With the global rubber market entering into an uncertain phase, any additional insight will certainly arm the user with more information to navigate through this period.
Arusha – I believe more is always better than less or nothing. Having said that Farah, do you think that this Russia-Ukraine crisis following the pandemic might lead companies to rethink and develop suppliers nearer to home which in the case of rubber could be a possible shift to synthetic rubber?
Farah – To me, what’s most important is the ramifications of the Russia Ukraine crisis coupled with recent supply chain issues would just mean countries will grow to become more insular and increase domestic capabilities. Furthermore, most of the global trade keeps stockpiles to a maximum of 90days – if such global uncertainty continues for a longer period, countries would have to adjust.
The world order is changing too. Looking at Russia and Ukraine and the various countries who have sanctioned Russia vs those who haven’t – the battle lines are clearly drawn: It is a battle of supremacy between China and the US and their respective allies.
Typically, higher oil prices should lend more popularity to natural rubber. However, necessity is the mother of invention, and synthetic rubber was borne out of WW2 as the Americans sought to reduce reliance on ASEAN-grown natural rubber in case Japan blocked the flow. If either natural or synthetic rubber supply is viewed to be at risk in the same way as wheat and fertilizer are today due to the majority export from Russia, then the country most reliant on exports will do what it can to protect that.
For now, a peaceful outcome is what’s being hoped for humanity, the markets, and the global supply chain.
Arusha – I do agree to that Farah, So clearly, supply-chain management is entering a new era coming out of a relatively benign environment of the last three decades. We will still see trade growth for rubber, as it is difficult for any country or region to be self-sufficient in all aspects. But the new focus on resilience and how to sustain through the volatility is going to be challenging for the industry.
Thanks, Farah and Alvin for joining us on Helixtapping the Industry.
Farah – Thanks, Arusha..
Alvin – Thanks Arusha.
Arusha – If you enjoyed today’s episode, let us know at marketing@helixtap.com!
For more updates on the Rubber industry please check out www.helixtap.com and you can also follow us on socials under the handle Helixtap.
Thanks for tuning into “Helixtapping the Industry”. Until next time!