FRANKFURT (Reuters) -- German tire and brakes maker Continental AG expects natural rubber prices, bid up by speculators to fresh record highs, will wipe out nearly $1 billion in profits this year if it cannot offset the hit.

CEO Elmar Degenhart said today the company would redouble efforts to move away from standard, low margin tires wherever possible and boost sales of more lucrative high performance tyres to compensate for the drastic rise in costs.

"We already initiated price hikes at the beginning of 2011, but they are not nearly enough to even remotely offset the recent increase in rubber prices," he told reporters at the company's annual news conference.

Heavy rains impeded tapping in Thailand, Indonesia and Malaysia, which control roughly 70 percent of the global output, leading to a series of historic highs since October.

"The supply from producer regions hasn't matched the average yields of the past and the second factor is that speculation is playing a role," Degenhart told reporters.

Continental is the fourth-largest tire producer in a highly consolidated industry, a characteristic that normally ensures excellent pricing power, but it can charge customers more for replacement tires only every few months.

The company aims to keep its adjusted operating margin constant at 9.7 percent this year despite its expectations that a price for natural rubber above $5.50 per kilogram will add 700 million euros ($972 million) in costs.

Commerzbank recently forecast continued high rubber prices this year as China's car market grows faster than supply, even though 1 million hectares of rubber trees planted between 2005 and 2008 can finally begin to be tapped.

Moving up the chain

The bottleneck in the natural rubber market "is likely to be aggravated further" as February to May remain seasonally the lean period for tapping, according to the Association of Natural Rubber Producing Countries.

Soaring prices for food and energy have been lifting headline consumer price indexes above thresholds relevant to central bank policy makers around the world, but so far most have avoided rate hikes citing little perceived threat these would be passed on to consumers via "second round effects".

January saw the highest rise in producer prices in the history of the euro zone at 6.1 percent annually, and provided fresh evidence that inflationary pressures from raw materials are creeping up the value chain to lift the costs for intermediate goods.



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