This article has previously been published in the September 1998 edition of European Rubber Journal.
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Collapse is now inevitable
By David Shaw, ERJ editor
So, the International Natural Rubber Agreement is about to collapse. Not quite yet.
I write this before the August 20 meeting of the ANRPC, but that meeting, I am sure will result in an ultimatum. The producers of natural rubber will insist that the Market Indicator Price referred to in the INRA is somehow based in dollars.
If that happens, the producers hope the buffer stock manager will be forced to intervene in the markets and the price will go up, improving the export earnings of all the main rubber producers.
Perhaps the consuming countries are so keen to rescue the Agreement from threat of collapse that they will agree to this ultimatum at their next meeting in October.
After all, there is provision in the Agreement to reflect gross currency price shifts and perhaps the consumers will adopt a broad interpretation of the rules of the Agreement and the singular circumstances of the Asian currency collapse.
I hope they do not. It would be short sighted to say the least.
Malaysia is the major instigator of the changes to INRA, but Malaysia has moved beyond the plantation economy. It now likes to import cheap rubber from other developing countries to use in its established tyre and latex sectors. The Malaysian government needs to cut public spending and sees the natural rubber sector as a drain on resources, It will use the Agreement - and all the other tools at its disposal - to get as much money from the sector as it can, while reducing its own financial contribution.
Malaysia pushed to win a place in the executive director's chair in the closing stages of the last negotiations. "Give me that, or else..." they said. Malaysia's generous allies tried to pacify their friend and sacrificed their own desires to appease Malaysia.
Now Malaysia is playing the same trick on the consumers. "Give me that, or else..." they are saying, demanding, in effect, that the consumers break the rules agreed by all parties after long and serious negotiations. Malaysia is not trying to conceal its objectives - they want the dollar price of rubber to rise. Pure and simple.
The odd thing is that the producing countries turned down a suggestion to link the price to the dollar during the negotiations leading up to the present agreement. Then, Malaysia thought such a link would tend to hold the rubber price down yet now the same diplomats insist it is the only way of saving the natural rubber industry.
In fact, a price increase would help the growers in South America and in Africa, as they continue to suffer from the decline in the dollar price of NR. But would it save the Agreement? Perhaps in the short term, but I am convinced that Malaysia, having seen those tactics twice win concessions, would not stop there. They would seek yet more concessions from their friends and trading partners. Each time the threat would be the same. "Agree to our demands, or else, we will withdraw from the Agreement."
If this is the case, then surely it is better to allow the Agreement to gracefully fade away now, rather than make strenuous efforts to save it, when Malaysia appears intent on turning the Agreement into a price support mechanism, rather than a price stabilisation mechanism.
After all Malaysia has nothing to lose either way. If prices rise, then it can claim a victory for its own smallholders and claim that Thailand has been freed from the self-imposed torture of spiralling subsidies to smallholders.
If the Agreement collapses and prices fall further, then Malaysia will import material at rock-bottom prices from Vietnam and Indonesia to use in its tyre factories.It can export those tyres at dollar prices to America, Europe and Japan.
There is a sub-text behind these unsubtle negotiations. Will the supply of NR match demand?
For the last 30 years or more, professional economists have been predicting a shortage of NR around ten years on. It has not yet happened. Each time, a new area becomes planted, or the demand pattern changes, or yields increase. Is this decade any different from previous ones? I do not know, but I feel that it is not.
As Malaysia digs up its plantations to sell rubber wood and make golf courses, it is also building tyre factories and making cars. In ten years, I suspect that Malaysia will be a net importer of NR. Is it really in Malaysia's interests to have a shortage of rubber in ten years?
One of the difficulties with the rubber sector is that the delay from planting a tree to its prime productive life is longer than an economic cycle, so whatever we do now, it is impossible to see how those actions will affect the economy in the future, and this, I suspect is one of the reasons why the predictions of NR shortages have never come true. The tyre companies can make their predictions of demand around five years into the future, and that is just about as long as it takes to bring a plantation from bare land into productivity.
So watch how the large tyre companies invest in plantations and how they influence the aid and development banks to invest in the sector, and you will see how they expect the NR trade balance to develop. I do not think they will allow themselves to go short.
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