The EU Deforestation Regulation (EUDR), which aims to limit deforestation and forest degradation caused by the expansion of agricultural activities worldwide, requires operators to carry out due diligence on products such as natural rubber and its derivatives imported and exported to the EU market. The EUDR came into effect on June 29, 2023 and will be enforced on December 30, 2024, with micro and small businesses being relaxed until June 30, 2025. As the date of EUDR enforcement approaches, how will it affect the market?

Eu imports of natural rubber and tyres

Global natural rubber production is concentrated in Southeast Asia, accounting for more than 86% of global production. Among them, Thailand, Indonesia and Vietnam are the top three glue-producing countries in the world, accounting for 33.5%, 21.9% and 8.6% of production in 2022, respectively. In recent years, the African country of Cote d 'Ivoire's natural rubber production has experienced explosive growth, and it is expected that in 2023 Cote d 'Ivoire's production will surpass Vietnam and rank third. China is the world's fifth largest producer of rubber, but the huge domestic demand makes the domestic demand short, but to rely on imports, import dependence as high as 87%. India is the world's sixth largest producer of rubber, mainly characterized by self-sufficiency, there is a certain phenomenon of raw material imports. Malaysia is the world's seventh largest producer of rubber, in recent years has gradually transformed from a rubber planting and processing exporter to a processing exporter of incoming materials.

The EU market is almost entirely dependent on imports of natural rubber. In 2022, the EU imported 1.3538 million tons of natural rubber, accounting for about 9.44% of the global total. The main import sources are Thailand, Indonesia, Cote d 'Ivoire, Vietnam and Malaysia, accounting for 88% of the EU's total natural rubber imports. Thailand, Indonesia and Cote d 'Ivoire accounted for 73% of the total, while Vietnam and Malaysia accounted for 15%. According to the season, the peak of natural rubber imports in the EU is from March to May and from August to October every year.

In 2022, EU tire imports amounted to 2.3882 million tons, mainly from China, India, Turkey, South Korea, Thailand and so on. Among them, the total number of tires imported from China accounted for 33%. It is roughly estimated that in 2022, the EU imported tires and rubber products equivalent to about 906,400 tons of natural rubber, plus the imported natural rubber of 1,353,800 tons, a total of about 2,60,200 tons, accounting for 15.76% of the global total natural rubber, that is, about 16% of the world's natural rubber is covered by EUDR. Seasonally, EU tire imports rose at the beginning of the year and fell in the fourth quarter.

Impact of EUDR on natural rubber market

The EUDR is built on the basis of complete traceability of the supply chain and requires operators to carry out due diligence on specified products, which undoubtedly creates new trade barriers in the related commodity industry. Therefore, the impact of the implementation of EUDR on the natural rubber market needs great attention. At present, the feedback of the main import sources of natural rubber in the EU shows that Thailand and Cote d 'Ivoire have responded positively, saying that they are willing to comply with the EUDR and make preparations in advance, Indonesia and Malaysia are relatively negative, and are still in the process of negotiating with the EU, and Vietnam has not yet expressed its position.

According to the analysis, the implementation of EUDR will have the following impact on the global natural rubber market:

First of all, change the global natural rubber export pattern.

On the one hand, Thailand and Cote d 'Ivoire, which account for about 52% and actively cooperate with the EUDR, are expected to further increase the proportion of natural rubber exported to the EU after the implementation of the EUDR, Cote d 'Ivoire's viscosity to the EU market is relatively greater, and Indonesia and Malaysia in the run-in period, the proportion of natural rubber exported to the EU is likely to decline. On the other hand, the initial implementation of EUDR will have a certain inhibition on the export of natural rubber from the main producing country to the EU, and the expectation of its export tilt to the Chinese market will be enhanced.

Secondly, increase the export price of natural rubber.

EUDR requires raw material traceability and certification, which undoubtedly increases the cost of the rubber supply chain, including but not limited to raw material acquisition costs, operating costs, and certification costs. At present, the market generally expects that the cost will increase by 200-300 US dollars/ton. According to the calculation that about 16% of the world's natural rubber is covered by EUDR, the theoretical median price increase of natural rubber is 32-48 US dollars/ton.

Again, weaken the advantage of China's tire export.

China is the world's largest importer of natural rubber, and the world's largest tire producer and exporter. The upward price of natural rubber exports will raise the production cost of China's tires, on the one hand to reduce the relative price advantage of domestic tire exports, on the other hand, the compression of tire companies' profits will form a negative feedback on the upstream.

Finally, ahead of the EU natural rubber and tire demand.

The relevant producers and consumers in the EU are the final receivers of the rising cost of imported goods, and the rising price of imported natural rubber has suppressed the consumption of related products in the EU to a certain extent. This is difficult to quantify at this stage and depends on a number of factors, including the resilience of the EU economy and changes in policy. In addition, after the implementation of the bill, import costs will rise, which is bound to stimulate the enthusiasm of relevant operators in the EU market to replenish inventories in advance, and the probability of EU demand is larger, thereby squeezing the share that originally flowed to China and other markets.

In summary, whether it is the export tilt to the Chinese market brought about by the change of natural rubber export pattern, the suppression of domestic tire export price advantage and the profit compression of tire enterprises, or the decline in EU demand caused by the rise in EU import prices, these bearish factors may not be the dominant influence on rubber price changes in 2024. On the one hand, the actual verification of these factors should be in 2025 after the real implementation of the EUDR, but it does not rule out the transaction of the node may be in the fourth quarter of 2024. On the other hand, considering that the main natural rubber producing countries are mainly produced by small farmers and cross-border trade is complex, it is relatively difficult to trace the source, and Indonesia and Malaysia are negotiating with the EU on EUDR, the specific implementation of EUDR has certain variables.

As for the impact of EUDR on natural rubber prices, the focus of attention in 2024 is the rise in natural rubber export prices and EU demand. With the approaching of the enforcement date of the bill, more and more operators produce products that meet the provisions, and the cost increase effect is enhanced, which forms support for the spot and disk, and the time node may be in the fourth quarter. In addition, according to the seasonal nature of natural rubber and tire imports in the EU, the peak of imports occurs in March to October. Therefore, in the second and third quarters, the EU's unexpected replenishment needs to be focused on, of which the replenishment in the second quarter may have a stronger impact on prices.

More importantly, China is the world's largest exporter and second largest importer of rubber, and is at the core of the global value chain. In order to fulfill our responsibilities as an environmental power and enhance our international status in environmental protection, we should continue to strengthen the research on the relationship between trade and environment, solidly promote the reform of environmental protection related mechanisms, actively seek opportunities for international cooperation on zero deforestation, further improve our traceability system, and achieve sustainable development of trade and environment!