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Alternative Investments

Looming Rubber Shortage Provides Another Chance to Profit

It seems the world is facing a lot of shortages these days. I’ve written articles about shortages in semiconductor chips, copper, platinum, palladium and nickel.

As if those weren’t enough, now there’s another looming shortage in a very important commodity: natural rubber.

Now, as we know, when a resource is in short supply but demand remains the same, prices skyrocket.

As the U.S. has reopened and cars have returned to the roads, demand for rubber tires has picked back up. But, at the same time, the region that produces rubber has been devastated by a fatal fungus.

This is the perfect recipe for high prices… and record sales for a few lucky manufacturers.

When Rubber Doesn’t Meet the Road

Natural rubber comes from rubber trees, which are tapped for their sap in a manner similar to sugar maple trees. Workers collect the sap, concentrate it and dry it in large sheets.

Natural rubber is further processed into car tires, rubber gloves, elastic and gaskets, among other essentials.

About 90% of rubber trees are grown in Southeast Asia, namely Thailand. It has about 5.5 million acres of rubber tree plantations.

The country produces about 2.6 million metric tons of rubber annually. But right now, a fungal disease is spreading throughout Thailand’s rubber plantations.

The fungus makes the leaves fall off the trees. It causes rubber sap production to drop by 50%.

Indonesia is another major rubber producer. But it’s seen almost 950,000 acres damaged by the fungus.

When the pandemic hit, demand for rubber slowed. Consumers were hunkered down at home, buying computers and video games instead of cars. That caused rubber prices to plummet.

In order to save money, producers neglected to follow proper fertilization techniques. But this created unhealthy trees and allowed the fungus to spread.

Many of the smaller plantation owners can’t afford the cost of the antifungal chemicals. So they are faced with reduced output and lower income.

A Good Year to Bet on Tires

China is the world’s largest user of natural rubber. It imports more than five times as much as the U.S.

Natural Rubber Usage in 2020

China’s was the first big economy to reopen during the pandemic. To replenish its dwindling reserves, China started making big rubber purchases as its economy ramped back up.

More than a year ago, U.S. carmakers cut back on rubber orders as car shoppers disappeared. They were then left scrambling to secure supplies as American car buyers returned to showrooms en masse.

As demand has increased, prices have responded in kind. At the end of May 2021, rubber prices stood at $1.05 per pound, nearly double the price of rubber during the pandemic.

Rubber per Pound

The higher prices are good news for rubber plantation owners and producers. They can now better afford to fight the fungus.

Fungus-free trees will produce double the sap of infected ones. Higher prices and increasing demand are also incentives for plantation owners to plant more trees.

Not to mention that the middle classes in China and India are continuing to grow. And the first things they want are cars. That means the demand for rubber is just going to increase.

In 2020, the global demand for natural rubber reached 15.2 million metric tons.

By 2026, the annual demand is expected to jump to 20.1 million metric tons. Much of that demand will come from the Asia-Pacific region.

For investors who want to play the possible rubber shortage, it’s hard to beat Goodyear Tire & Rubber Co. (Nasdaq: GT).

Goodyear makes and sells a wide variety of tires. Its tires are used on automobiles, aircraft, buses, farm equipment, motorcycles, trucks, mining equipment and industrial equipment.

Over the past year, Goodyear shares have appreciated about 96%. That’s a fantastic return for shareholders.

With a looming rubber shortage, you can expect an increase in tire prices in the near future.

While that’s not good news for tire buyers, it would benefit Goodyear’s sales nicely. And if you were to invest in the shortage, it could be good news for your portfolio.

Good investing,

Dave

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