Skip to content

PODCAST – ESG, sustainability, and compliance in tyre manufacturing, rubber production and the greater commodities industry

    Helixtapping the Industry
    Helixtapping the Industry
    ESG, sustainability, and compliance in tyre manufacturing, rubber production and the greater commodities industry

    What is the cost of demonstrating compliance? The question that is currently plaguing the tire manufacturing industry, especially after the recent inclusion of natural rubber in EU’s deforestation law. 

    Hello and welcome to Helixtapping the industry, a series where we examine the forces driving the rubber markets today. 

    I am Farah Miller, CEO and Co-Founder of Helixtap Technologies. With me today is Mr Jerome Monsaingeon, an advisor of Helixtap. Jerome is our rubber expert in ESG as well and tire manufacturing supply chain.

    Today we will discuss with him the increasing impetus on sustainability in the rubber supply chain and ESG which is Environmental, social, and governance. 

    Farah – Hi Jerome, welcome to Helixtapping the industry 

    Jerome – Hi Farah, thank you for inviting me

    Farah – Before we deep dive into whether ESG is a boon or a bane, let’s start with a little about yourself, your time in the rubber industry, and what makes you passionate about it. 

    Jerome – Well Farah, natural rubber is an exceptional natural product. And the world would have difficulties to operate without it. Rubber trading is a great job because you deal with many different people, and it goes from the forest to the finished tire… a product which by the way will end up being used by everyone in the world! And I don’t think there are many jobs with similar reach.  It is also an exceptional business with exceptional people on all continents.

    Yes, I am passionate about NR. And it is a passion shared with millions of other people (farmers, rubber producers, traders, Tire producers). Its a great challenge! And I was lucky to come into such a business, where you can find passion and fun at the same time. 

    Farah – I couldn’t agree more! There is a saying in rubber that one doesn’t ever retire in the rubber industry and we can see that all around us. So I would like to dive into our topic of this episode – the EU deforestation legislation. How are you with your vast market experience seeing the situation unfold? To me, it does not seem to be a win-win situation, at least in the short-mid term. 

    Jerome – Well, it’s indeed a tricky situation. Let me first explain where the EU stands today on world deforestation. The ultimate goal for the EU is to end world deforestation. But at the same time, it doesn’t want to put its industry at a competitive disadvantage against countries which would take no action on deforestation. And it’s a difficult challenge!

    Today, there are basically two groups driving the EU deforestation debate: 

    The EU Commission (also known as the EU Executive) and the EU Parliament… and they are not in agreement. 

    So on one hand you have the EU Commission, they intend to include 6 commodities namely beef, soya, palm oil, coffee, cocoa, and timber with 100% sourcing traceability with a universal set of rules.

    Now the twist in the plot is the EU Parliament wants to include all the commodities, which means rubber is under scanner too with three factors to be considered for traceability –

    • “Duty of Care”
    • Geolocalisation
    • Report to Country Local Admin juridictions (Legal)

    However, the EU Parliament is open to adjust the regulations as per the industry demand requirements. They will put some flexibility into that.

    As you can see, these 2 EU organizations have a very different approach. But… Nothing has been finalised or voted [on] yet! These 2 EU entities have agreed to give themselves another 3 months to come to an agreement/compromise. The EU Parliament will be the ultimate decider. A vote is expected before December 31st 2022.

    Farah – So now the question now boils down to who the beneficiaries and the losers will be. What is your personal view?

    Jerome – I wish it were so black and white but unfortunately it is not. Different countries like the US, Japan, China and Europe all have different approaches when it comes to sustainability.

    As I mentioned earlier, the EU law should be finalised by the end of this year. But meanwhile, the US has a deforestation law under study. Currently, the UK forbids deforestation but has no controls in place. And this is the case with most other countries as they have limited or no law on deforestation and rarely do they have any controls in place.

    But Latin American, African and southeast Asian countries said they have “serious concerns” about the future EU legislation, which they say “disregards the local conditions and national legislations of developing producing countries, and their efforts to fight deforestation.”

    They simply warned that the law will “generate trade distortion and diplomatic tensions, without benefits to the environment. It could also increase costs and have negative social and economic consequences for developing countries.”

    Then comes a second layer of influence, the car makers’ influence. It’s important to note that the car makers have not yet implemented in their suppliers’ contracts, clauses specifically on deforestation. EU car makers are starting to push for sustainable NR compliance which would probably include deforestation. Some US car makers are also talking about it. The other continents have not yet started anything.

    But… it will be happening sooner rather than later. The question is – what will be their contractual demands?

    In other words will it be the car maker Specific? Will it be the EU rules? Will it be the Local rules? Others? And Nobody knows yet what it will be!

    And keep in mind that the tire makers are not against a deforestation law provided the rules are practical and workable!

    And let me share with you the reality is that there are 6 million farmers tapping trees and selling NR on a plantation which is on average 1-2 ha. 

    And you realize no system can put 100% guarantees on such a large Supply Chain network. Let’s take an example, a large tire manufacturer can source its NR from about 150 NR factories across the world. And those factories get their raw material from about 2 million farmers… You realize it is impossible even with today’s technology to track and trace, at the farmer level, 100% of the NR delivered to those tire factories.

    But to try to accelerate the improvement process, the tire makers have set up the GPSNR (Global Platform for Sustainable NR). So what it means is that they are working together to bring solutions and guarantee sustainable NR. Keep in mind that deforestation is one element among many others like water, fertilizers, farming practices, solvents, and others as well.

    On addition to that , 4 tire makers under the leadership of Michelin and Continental, but with Goodyear and Pirelli – have started a company called “RubberWay” to do risk analysis and build projects to work on the identified risk areas.

    As you understand, everyone is trying hard to improve things. But proving the NR sustainability including “no deforestation” is a very very complex project. 

    We still need time and new technologies like drones, AI and the journey will be long…

    Farah – Indeed, that kind of technology especially with 6 million smallholders in a very farmer driven industry is a long-term plan, but the smallholder farmers seem to be underrepresented. 

    So if the European deforestation law gets approved, adhering to regulations would also narrow options to source natural rubber for the tire manufacturers. In this type of case what are your thoughts on the tire manufacturers next steps in trying to ease the situation? 

    Jerome – Well, the most rational move in such a situation would be to ease it. If tomorrow, the country’s laws and the car makers require proof of a full sustainability, the tire manufacturers will have no choice but to comply with the country’s laws and car makers’ contracts, it’s obvious. But in that case, they will select NR suppliers who can guarantee the sustainability while reducing the complexity of the proof and of the supply chain. 

    To protect themselves, the tire manufacturers will narrow their supply basis to the low-risk areas. It’s the only way to reduce the complexity and guarantee compliance.

    Now the question would be – who will be beneficiaries and who will be the losers?

    The direct consequence will be a concentration of the market. Smallholder farmers will become losers when located in remote areas or areas identified as “risky”. And you understand that the social impact may be substantial as those areas are already the most underdeveloped areas.

    Well on the rubber traders side they are estimated to number 100,000 in Southeast Asia. Obviously some will lose and disappear, some will win and grow.  NR factories will be impacted and will be facing financial difficulties when situated in the “risky areas” and likely shut down. So, it will be just the survival of the fittest.

    The obvious winners will be the car customers, meaning all of us… because you will get a car “guaranteed” as fully sustainable, including the guarantee of no deforestation.

    However, keep in mind that there will be great social impact to this process across the whole supply chain. So, sustainability will be guaranteed, but it will take years and new technologies to be fully compliant. 

    Farah – Thanks for that very comprehensive answer Jerome. I mean moving on to a major topic that was plaguing everybody in 2021 – Supply chains. But then this provides a new challenge. So according to you, what would be the most challenging aspect for the tire manufacturers – sourcing raw materials or adhering to the unwritten decision of being sustainable?

    Jerome – After Covid, the tire makers’ priorities have become a very interesting question. It’s like choosing a limb – raw material sourcing or sustainability?

    We do not have a full understanding of the impacts of Covid on sustainability policies and its implementation yet. But we can guarantee that the supply chain was and still is the priority. Simply because tire manufacturers cannot afford to stop their tire factories. 

    So iIt was a complex and difficult process as one has to deal with multiple variables at the same time, such as commitments on long-term contracts, a drop in the NR demand, and a shortage of containers and ships. And its been a daily challenge! 

    Unfortunately, one of the consequences has been decisions to ship sometimes at any cost, with no real concern for the additional CO2 emissions generated…

    One could think that to save costs, sustainability budgets could have been reduced. It looks like this was not the case. Those budgets were not impacted by the lockdown and business slowed down.

    Companies have, in some cases, even increased their budgets as their headquarters are well aware of the public pressure on sustainability. We know that financial reporting now includes large aspects of the sustainability strategy. And we also know that Boards of Directors and CEOs are questioned by financial analysts now, requiring proof of compliance.

    So, yes, the supply chain remained a priority, but the efforts on the NR sustainability, including budgets, were not reduced. 

    Farah – So it looks like there is a lot to balance. Especially amidst all the changes and in the midst of volatility, demand cuts and energy crisis, a lot of this seems European focused – will the other markets also follow suit? 

    Jerome – Well the first question is whether the EU sets the tone on sustainability  will depend on how it manages its decision on deforestation laws so we’re waiting for their answer end of this year. But will other markets follow? The US probably will follow but slowly. The car makers will probably move faster than the laws. The rest of the world will likely wait and see. 

    However, the real question is how quickly, if at all, China will join the sustainability race. Let’s keep in mind that China represents 40% of the NR world consumption. 

    Farah – It is important for all the actors to join in, especially important also for China to join the sustainability race, and I believe we are seeing some early signs of that (especially in other commodities).  Conversely, if we look at producers – many of them have been navigating negative margins. One of Helixtap’s goals is to ensure physical indices reflected by the various grades of NR. Another goal is you know for critical data to be readily available to market participants, empowering them to make better, more timely, decisions. 

    So looking from all of these as someone with experience in procurement, before moving on to a large tyre manufacturer, how do you think Helixtap’s physical indices could help users navigate these volatile markets?

    Jerome – I strongly  believe what Helixtap does supports decisions at a glance which is very important for the rubber traders. And its got historical data analysis, it covers and analyzes the key challenges for the industry. What possibly comes in most handy are the trends identified and forecasting prices by grade and source of origin.

    Helixtap has developed a very strong, reliable and clear dashboard, its a key tool for any market participant to gain a quick market overview and support their jobs on a daily basis for their decision making.

    Farah – Yeah I mean , we are constantly finetuning our Helixtap platform and creating new products to support our users in navigating the vibrant but volatile rubber market. And this of course includes a foray into sustainability and supporting users in that push for sustainability and usability.   

    Thank you for sharing your insights into this ever-growing discussion on sustainability, Jerome. 

    Jerome – Thank you Farah

    Indeed the real world implications of such a move would lead to a structural change in the industry but it is high time for some technological innovation in this space that does not operate at the expense of the smallholder farmers who are the definitely  backbone of this critical industry.

    If you found today’s episode insightful, 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.

    Thank you for tuning in to “Helixtapping the Industry”. Until next time!