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Customer demand for sustainable rubber drives supply chain changes

SGX invests in trading platform promoting digitalisation and sustainability efforts

26 July 2021

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As environmental concerns become more important to consumers, leading manufacturers are responding by changing their procurement practices. That has spilled over into the commodity supply chain, leading to greater interest in sustainable production practices.

One example is the car industry. German automaker BMW is partnering with tire maker Pirelli to use sustainable rubber for its tires. Starting in August, a small number of vehicles will roll off the factory lines with tires made with 100% certified sustainable natural rubber.

Tire companies purchase 70% of natural rubber produced in the world, which means Pirelli and its peers have the ability to transform the process of farming and producing natural rubber. For the futures industry, this presents both challenges and opportunities.

Exchanges such as the Japan Exchange and the Singapore Exchange provide price discovery for physical rubber in their futures markets. For now, the amount of rubber that meets the new sustainability standard is just a fraction of global supply. Changes in the physical market are steadily taking place, however, and commodity exchanges are poised to follow these changes.

Recent actions at Singapore Exchange provide a clear example of this evolution. The exchange bought a stake in a recently established digital trading platform called HeveaConnect that specializes in supporting the production and procurement of sustainable rubber. SGX also is providing the platform with pricing inputs from its rubber futures market and is working with the platform's backers to promote its adoption.

Additionally, SGX has a rubber committee comprised of representatives from key producers and tire makers that provides a forum for inputs and suggestions on market developments including sustainability – which ultimately help shape contract specifications for its SICOM rubber products.

"SGX SICOM is today the global pricing benchmark for natural rubber, but we asked ourselves how we might build and improve on that," said William Chin, head of commodities at the Singapore Exchange. "HeveaConnect provides not only a layer of sustainability that is increasingly important, but also the digitalisation of commodity markets that we feel strongly about at SGX. It's about making trade flows more efficient and transparent to serve the physical trade, and scaling our price benchmarks with complementary sustainability data."

It is still early days in the evolution of the rubber supply chain. But with a clear trend in client demand and procurement policy, it seems likely that price discovery and risk management for sustainable rubber will become increasingly important for commodity traders and derivatives exchanges.

Certifying rubber as sustainable

Most rubber originates from tree plantations in Thailand, Indonesia and other countries in Southeast Asia. Though natural rubber is certainly more sustainable than the synthetic rubber produced from petroleum, the production process can be damaging to the environment as some rubber tree plantations are created by clear-cutting native forests. Some major corporations that use rubber have taken notice, and want to better understand where their materials come from in order to avoid undue environmental impacts.

French tire manufacturer Michelin was among the first to voice sustainability concerns over rubber, making public pledges in 2015 to focus on traceability and transparency in its supply chain. Today Michelin is the world's largest purchaser of sustainable rubber on the planet. And by 2050, it plans to have 100% sustainable sourcing for all of its tires.

Pirelli has announced similar goals. According to its latest sustainability roadmap, the Italian tire manufacturer has set a target of 40% renewable materials by 2025 – which includes sustainability harvested rubber. The company has also begun auditing its suppliers to assess environmental risk.

The act of certifying rubber as sustainable is no simple task, however. It involves using natural rubber from a certified plantation that operates in accordance with the standards of independent bodies such as the Forest Stewardship Council. This includes the process for verifying chain of custody certification that traces the path of products from forests, as well as the standards that certify bodies in the US and elsewhere that go out in the field to investigate rubber supply chains.

While natural rubber has many uses, tires consume about 70% of global production and thus present a unique opportunity to lessen environmental impacts, said Jeremy Harrison, chief markets officer for FSC. "With the launch of the first FSC-certified tire, Pirelli and the BMW Group have initiated a significant step in the sustainable transformation of the natural rubber value chain," Harrison said.

There is also a push for standards under the Global Platform for Sustainable Natural Rubber, an industry-supported effort to define sustainability for the natural rubber supply chain. Various non-governmental organisations and environmental groups are also supporting this effort, including the World Wildlife Fund and the Programme for the Endorsement of Forest Certification.

Building a sustainable rubber marketplace

After natural rubber can be certified as sustainable under shared standards, here's where commodity markets come in.

In 2018, a Singapore-based startup called HeveaConnect launched a digital marketplace for trading sustainably processed natural rubber. Taking its name from the genus of plants that produce natural rubber, HeveaConnect has built an integrated suite of data and technology solutions that focus on every step of the supply chain for this commodity.

The trading platform was originally built by Halcyon, one of the biggest rubber producers in the world, and then spun out as a separate company. HeveaConnect won backing from Singapore-based DBS Bank in 2018 and then in 2019 saw an investment by Itochu, a major Japanese commodity trading firm and rubber producer. In 2021, SGX joined to bring additional expertise on running commodity exchanges.

The Singapore exchange agreed to buy a roughly 9% stake in HeveaConnect, the latest chapter in Singapore's more than a century of experience in rubber trading. But while this digital platform and its traceability focus are innovative, SGX's William Chin said the exchange plans to follow a very traditional approach to any changes to natural rubber markets – namely, putting customer demand first.

"Unlike in other physically delivered commodity products, SICOM rubber benchmark prices closely reflect the sustainability agenda in natural rubber," said Chin. "And that's because we have always rooted the deliverability of SICOM rubber in quality-assured factory lists underpinning the procurement needs of rubber participants.

In fact, Chin points out that SICOM rubber contracts already include some quality specifications aligned with the sustainability goals of major tire makers, and the prices SGX prints in its natural rubber benchmark reflects those standards. And if and when tiremakers like Michelin and Pirelli demand additional specifications such as traceability, SGX is ready to respond.

"Our ability to be fully aligned to the procurement policies is what will ensure the market for sustainable natural rubber evolves and thrives," Chin said. "It's more challenging to play an ESG role in commodity markets that are very fragmented. But the structure of the rubber market is unique, where the majority of consumption comes from a comparatively small but influential group of major tire makers that can provide clear signals as to what they need and what their end customers want."

Many exchanges are pursuing changes to their product offerings related to sustainability concerns, but real world procurement policies are ultimately what drives liquidity in commodity markets, he adds.

"The role that SGX plays in price discovery is an important factor in the global movement towards sustainability," Chin said.

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