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The Biggest Shortage That Nobody Is Talking About

March 15th, 2011

I drive by the same gas station every day. And every day last week, prices were higher than the day before. Not too surprising, given the unsettling situations in North Africa and the Middle East, but it doesn’t help the mood of consumers, who are always worried about crude oil supplies. We’re all too familiar with what happens when there’s even a perceived disruption or threat to the supply. Prices skyrocket – and ultimately, it affects consumers at the pump. But there’s another supply shortage in the making that no one is taking about. In fact, until Bloomberg mentioned it a week ago, it’s likely that few people were even aware that it was becoming a problem. Yet it will affect just about everyone. Drive a car, truck, or motorcycle? It will affect you. Ride a bike? It’ll affect you too. Even if you walk to work in a pair of sneakers, it will have an affect on you. Hospitals and doctor’s offices around the world will all be affected by the coming shortage of this product that we all take for granted. All the things I just mentioned contain this material – and it’s becoming increasingly short in supply…

Natural Rubber: The Shortage That’s Centuries in the Making

I’m talking about natural rubber. Natural rubber is made from the sap of rubber trees. It was first discovered and used by the Aztecs in Mexico, Peru’s Incas, and native tribes in the Amazon.

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Natural rubber was made into balls for games, figurines for worship and even used as incense. Columbus “discovered” rubber – at least as far as Europe was concerned – and by the 1700′s, it was being used to make tarps, diving suits, and bottles to hold water.

Even then, demand quickly outstripped supply. It was clear something had to be done, so around 1840, seeds were collected from trees in the Amazon basin and sent back to England for germination. They were then sent to Ceylon (present-day Sri Lanka) and the Malayan peninsula.

In 1888, the pneumatic tire was invented. When motorized vehicles followed shortly thereafter, demand for rubber skyrocketed.

Today, the Asia-Pacific region accounts for over 90% of the world’s supply of natural rubber. Thailand and Indonesia alone produce 60% of the world’s supply.

A Supply and Demand Reason To Buy Tires Now

The problem is that harvests in Thailand, Indonesia, and Malaysia won’t come close to meeting demand in 2011. They didn’t last year either. The end result is that stockpiles of rubber amassed in previous years have constantly declined.

According to Goldman Sachs (NYSE:GS) estimates, the world’s stockpiles are a mere 69 days worth of demand – the lowest in more than a decade. And according to a Bloomberg survey, those thin stockpiles could send prices skyrocketing by 32% this December.

This is particularly bad news for consumers. Think you’ll need a new set of tires next year? You might want to consider buying them now. You’ll likely save yourself at least 15% if tire makers continue to jack up prices.

Some have already decided to do so: Bridgestone Corporation and Michelin are raising prices by as much as 15%.

While it’s bad news for consumers, it’s good news for rubber producers, who can sell all they can harvest. Unfortunately, even though rubber tree farmers increased supply by 9% this year, demand will continue to grow even faster.

According to Goldman Sachs analysts quoted in the Bloomberg article, demand for rubber will soon see its highest levels since 2000.

The game-changer could be continued higher oil prices, which would put a damper on the economic growth that’s currently underway around the world.

If oil approaches the levels we saw a few years ago, demand for rubber – along with everything else – could suddenly experience a big slowdown.

Regardless of oil prices though, rubber supplies will drop in the coming weeks even if demand weakens. That’s because rubber plantations in Thailand, Malaysia and Indonesia are in what’s referred to as their “wintering period.” From February through May, trees drop their leaves and latex production is reduced by as much as 60%.

However, demand isn’t slowing down…

Where the Rubber Meets the Road

Global sales of light passenger vehicles will increase by nearly 8% this year, according to Ashvin Chotai, Managing Director of Intelligence Automotive Asia Limited.

China and India are buying automobiles at record rates. China’s passenger car sales will grow at a 10% to 15% clip this year – and likely even faster in 2012.

That will certainly jack up the demand for tires. The real problem is that tire manufacturers can’t seem to raise prices fast enough to compensate for the rise in rubber costs – and it’s impacting their earnings, at least in the short-term.

For example, Michelin said rising rubber costs would reduce its earnings by about $2 billion this year. Bridgestone expects to report a 17% profit hit this year. And Sumitomo Rubber Industries expects this year’s profits to slump by 58%, compared with last year.

Is there any respite?

Well, many companies are spending a fortune to plant new trees in Southeast Asia. And within a decade, the rubber supply is expected to increase by as much as 40% as a result.

In the short-term, however, expect to pay a lot more for everything from tires to condoms. Perhaps we should chart global birthrates against the price of natural rubber!

Good investing,

by David Fessler, Investment U Energy and Infrastructure Specialist

Related ETFs: iShares MSCI Malaysia Index (NYSE:EWM), iShares MSCI Thailand Invest Mkt Index (NYSE:THD), Market Vectors Indonesia Index ETF (NYSE:IDX)


NYSE:EWM, NYSE:IDX, NYSE:THD


 

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  1. May 6th, 2011 at 10:32 | #1

    any recommendations on how to play this shortage?

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