Malaysia's exit from INRO 'highlights cartel's failing'

Malaysia's exit from INRO 'highlights cartel's failing'

KUALA LUMPUR (Dow Jones): Malaysia's decision in October to
withdraw from the International Natural Rubber Organization may
not have alarmed the rubber industry, but its departure has
definitely thrust INRO's inability to prop up rubber prices into
the limelight, said Malaysian Primary Industries Minister Lim
Keng Yiak.

Lim told Dow Jones Newswires in an interview that by taking
the decisive step to leave INRO, Malaysia hopes to jolt other
producing countries out of their complacent dependency on INRO,
to return to coming up with strategies to help themselves.

"It's not necessary to form a cartel, but to come up with
product rationalization and improve marketing techniques whereby
we hope to get prices that are fair and renumerative to us as
producers, and not dependent on the intervention mechanism of the
buffer stocks of INRO," he said.

Malaysia's withdrawal, effective Oct. 15, 1999, was prompted
by INRO's failure to prop up the world's depressed rubber market
that has been weighed down by heavy stocks, slack demand and
fast-falling prices.

Prices of natural rubber have fallen sharply in absolute terms
from 5 ringgit a kilogram in the 1950s to some 2.74 a kilo this
year, but the prices of tires have increased many times over, Lim
said. Midday Monday, the price of standard Malaysian rubber 20,
or SMR20, was quoted at 2.30 ringgit per kilo.

"Who is making the profits? And who is almost subsidizing the
international tire companies?" he pointed out. "That's the
disappointment with INRO."

INRO's ability as a buffer stock operator to buy rubber to
lift prices in the depressed rubber market, on the other hand,
was hampered by the Asian financial crisis.

When the financial crisis erupted, Lim pointed out, the
consumer-country members were insensitive to the needs of the
three main producing countries, namely Thailand, Indonesia and
Malaysia, which were facing precipitous plunges in the values of
their currency versus the U.S. dollar.

"When we requested a re-negotiation of upping the lower
intervention price, the consuming countries, especially the U.S.,
refused to consider it. That was the last straw," he said.

INRO's reference price, denominated in a composite index of
Malaysian ringgit and Singapore dollar, determines the rubber
group's upper and lower market intervention levels, at which INRO
sells or buys rubber to stabilize prices.

He said prices of ribbed smoked sheet 1, or RSS1, in July 1997
were about 2.80 ringgit a kilo, which was equivalent to about 105
U.S. cents/kg then. This compares with prices a year later at
around 2.80 ringgit a kilo that, in terms of U.S. prices, have
moved in favor of consumers to only 62 cents per kilo.

"They were getting cheap sale, we were getting the same price.
So the depreciation of the currency only hit us, and there's no
shared responsibility," he said.

Malaysia's official departure from INRO is effectively still a
full year away, and it will continue to make contributions to
INRO until its official exit, Lim said.

Commenting on its plans for the rubber industry, Lim pointed
out that the Malaysian economy isn't dependent on selling rubber
in the international market. Export earnings from natural rubber
are less than 1 percent of total export earnings, he said.

While Malaysia has dropped from being the largest producer in
the world to the third-largest, it has become the fifth-largest
consumer of natural rubber in the world market, Lim said.

"Our rubber products industry is developing by leaps and
bounds. We prefer to use the rubber we produce for value-added
products to be exported to the international market," he said.

"We might just opt to become a consuming country. If we ever
return to INRO, we may return as a consumer member of INRO," he
said.