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.