Doubt cast on rubber cartel

Sari P. Setiogi, The Jakarta Post, Jakarta

The establishment of a rubber cartel by Indonesia, Malaysia and Thailand has had an immediate positive impact on the price of the commodity.

However, a top executive warned that International Rubber Limited (IRCo), which was set up by the three countries on Tuesday, might not succeed in propping up rubber prices in the long term.

Local traders said the rubber price on the international market rose to US$1.20 per kilogram after the signing of the accord for the establishment of IRCo from $1.17 per kilogram on Tuesday morning.

IRCo was established amid concerns over the declining price of the commodity over the past several years. The cartel was expected to prop up the price of the commodity and thus ensure bigger profits for millions of rubber farmers in the three countries. Thailand is the world's largest rubber producer, followed by Malaysia and Indonesia.

However, a top executive of an Indonesian rubber company told The Jakarta Post that he doubted the effectiveness of the cartel.

He mentioned the failure of the former International Natural Rubber Organization (INRO), which was dissolved in September 1999. The organization, which consisted of 21 countries made up of both natural rubber producers and consumers, failed to stabilize the price of the commodity.

"If an organization of 21 countries failed, how can a cartel made up of three countries do better?" he said.

The three countries have estimated that a total investment of US$225 million will be needed to make IRCo effective. They have agreed to put in $4.5 million as the initial investment in the firm, with Indonesia and Malaysia providing $1.5 million each and Thailand $2.5 million.

The three countries will share the total investment in the future based on their output with Indonesia obliged to provide $75 million.

However, the executive doubted if Indonesia could meet its obligations.

"Given the financial situation recently, are we really able to afford that much?" he questioned.

He also pointed out that each country in the cartel had their own interests, which could cause internal conflicts in the company. As an example, he mentioned Thailand's plan to open up 160,000 hectares of rubber plantations starting in 2004.

"This goes against the supply management scheme deal of 2001," he said.

IRCo will prop up the rubber price by controlling exports and output.