A Rubbery Tale of a Global Supply Chain

We use it when we drive a car or ride a bike. It’s in our shoes. It protects our hands when we wash dishes. And it’s in the balloons that make every child’s day.

Natural rubber, or latex, is used in many products, and believe it or not, it is one of the world’s top 20 volatile resources.

Natural rubber, or latex, used in many products, is one of the world’s top 20 volatile resources

Rubber is a striking example of the many problems today’s global supply chains face when it comes to natural resources. These challenges include monoculture and impact on ecosystems, a high concentration of production, changing demand and volatility, and energy- and resource-intensive production.

Cultivation and Industrial Use

The rubber tree, Hevea brasiliensis, is a native plant found in the Amazon rainforest that thrives in the ecosystem’s high-volume annual rainfall and stable tropical temperatures. From the sixth year of growth until age 30, the bark of these trees can be scraped to harvest sap, or “milk,” which is used to create fluid latex. When the trees stop producing, they are cut down.

With this growth pattern, producers cannot scale down or up quickly to follow demand or prices. The trees are usually cultivated in large plantations of 3,000 to 5,000 hectares, often sharing facilities with palm oil trees. As with many industrially used natural resources, the ecological footprint is sizeable because the trees do not live as long as other trees, such as their neighboring palm oil trees.

It’s well known that there is an increasing rate of land deforestation, use of fertilizers, water pollution, overuse of the soil, and lost biodiversity due to monoculture. Furthermore, the social impacts cannot be neglected as land ownership is often unclear or violated including expropriation. In addition, labor rights of the industry’s manual workers are often ignored.

In response, many alternatives are being explored. For example, scientists are testing the ability to use dandelions and their sap as a latex substitute. And as consumer demand for more eco-friendly products increases, advocacy groups are promoting more sustainable production practices such as protecting forest areas and improving human and labor rights efforts. As with other natural products like palm oil, wood, and textiles, progress is slow, and tight control in the global supply chain requires dedicated efforts that many companies try to avoid as long as their brand is not severely damaged.

There are several methods to produce rubber, and all energy-intensive. Liquid rubber needs to be heated to 120 to 200OC to create a polymer by cross-linking rubber molecules with sulfur and other additives. The so-called molding or shaping must happen before heating as the cross-linking process makes shaping impossible.

The Rise of Rubber’s Popularity

The Olmec people in South America produced a simple form of rubber from these trees nearly 4,000 years ago. In fact, early from the first Europeans in South America indicate a favorite game involving jumping balls made of an elastic material. In 1750, scientists worked with a natural material, and the first rubber factory was built in 1824 in Austria. In 1830, world trade was at 150 tons of natural rubber, after Charles Goodyear developed the vulcanization and created the modern rubber in 1839. Successive inventions by Dunlop and Michelin then raised worldwide demand for natural rubber to more than 7,000 tons.

At the time, most rubber was produced in Brazil. Workers had to move into the dense forest to search for the dispersed trees, which was labor-intensive and associated with health risks. Rubber barons grew rich while enslaving the native population and exploiting workers. In 1876, Brazil lost the monopoly when Henry Wickham smuggled 70,000 seeds to England. Only 2,700 plants grew out of them, but he yielded enough trees to transfer them to plantations in Saigon and Malaysia.

By 1900, chemists started to develop synthetic rubber, which then led to a high ratio of synthetic rubber used in the market. Nevertheless, natural rubber is still a widely used and valued material for many industrial and fashion applications since its resistance, elasticity, and load-bearing qualities cannot be matched easily by synthetic products.

Today, the world natural rubber demand is set to rise from 12 million tons in 2016 to 16 million tons within the next 10 years, according to estimates by the International Rubber Study Group (IRSG). Approximately 70 percent of this is used by the automotive industry, primarily for tires. Meanwhile, 13 percent is used for gloves and other devices in the healthcare field, 9 percent is sourced for manufacturers, and 8 percent is acquired for footwear and other consumer products, according to a report by Accenture.

Concentrated Production and Use

Unfortunately, the original source country, Brazil, no longer plays a significant role in rubber production, although the Brazilian state of Acre is now reentering the eco-rubber market. Today, the largest producers of rubber are Thailand (~40 percent), Indonesia (~30 percent), and Malaysia (~10 percent), followed by Vietnam, India, China, Sri Lanka, Philippines, and Cambodia. The top three producers form the International Tripartite Rubber Council, which controls rubber prices.

One reason why production is concentrated in Asia Pacific is the emergence of a fungal disease in South America that constrains commercial use. However, a high concentration of producers in one continent also has risks. Natural catastrophes, political changes, and other events may impact production significantly. According to some climate change scenarios, these countries may also soon experience extreme weather events such as destructive storms, intense rainfall, and unprecedented droughts.


Volatilities Ahead

Our analysis shows that natural resources are becoming more volatile as globalization increases. Our research is based on data from the World Bank, which was adjusted to reflect 2010 U.S. currency for consistency and demonstrates changes in abundance and price for many resources experiencing highly volatile markets.

Analysis shows that natural resources are becoming more volatile as globalization increases

Rubber is a highly volatile resource compared to other plantation-based, natural raw materials such as palm oil and crude oil. The price for natural rubber has fallen 70% over the past five years, a trend that negatively impacts the incomes of farmers, especially those with only a few acres of rubber trees.

As mentioned above, synthetic rubber, which is made of oil, has been used in place of natural rubber for decades. Low oil prices have led to an increase in synthetic rubber and weaker demand for the natural material. Given that oil prices have been at historic lows since 2014, we can certainly expect a further decline in price for natural rubber. Furthermore, high dependency on the automotive tire industry makes natural rubber producers sensitive to any changes in global car sales.

Four Recommendations for Managing Volatile Resources

Production of natural resources like rubber cannot be scaled up easily, especially when the resources depend on only a few countries. Here are four things you can do to make better use of these materials while protecting the supply chain:

  • Create a resource footprint of all products and design out over-dependencies on one resource.
  • Secure the quality of products and services by building up product stewardship for high-quality raw materials and derivatives with sustainable and ethical production.
  • Check out supply chain bottlenecks, enhance the resilience of your supply chain by widening your supplier network, and simplify new supplier onboarding.
  • Monitor resource volatility closely by creating a Live Business operation with real-time demand and production forecasts.

For more supply chain strategies for today’s consumer-driven economy, see Keep Your Customers Close And Your Suppliers Closer.

Kai Goerlich is the idea director of Thought Leadership at SAP.

This story originally appeared on The Digitalist Magazine as part of the 10 Weeks of Live Business series.