1 The Role of IRCo in NR Prices Stabilization Presented at International Rubber Conference & Exhibition (IRCE) 2007 by Yium Tavarolit Chief Secretary and Economist International Rubber Consortium Limited (IRCo) Venue Bali International Convention Center, Nusa Dua, Bali, Indonesia 15 June 2007

2 The Signing Ceremony of Memorandum of Understanding (MoU) of IRCo on 8 August 2003 in Bali

3 1. Introduction Natural rubber (NR) was first used by the indigenous people of the Amazon basin for a variety of purposes before it was introduced to the auto-industry in NR was traded like other commodities at least 75 years ago. In 1900 – 1910, NR prices rose sharply because its demand was higher than its supply and Brazil was only the major NR producing country supplying around 90% of the total production. After 1910, due to the emergence of Southeast Asian plantations, NR prices were pulled down by the increase in NR supply.

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5 Period of Suffering ( ) for Rubber- Smallholders Period of Suffering ( ) for Rubber- Smallholders In 1980, International Natural Rubber Organization (INRO) was formed under the agreement between major NR producers and consuming countries to stabilize NR prices. It started operation with high expectation, but collapsed in late 1999 because Global economic recession after 1995 through 2001 that effected the tire and auto-industries Economic crisis in Asia in mid forced many Asian countries to devalue their currencies including Malaysian Ringgit, Indonesian Rupiah and Thai Baht

6 The Daily Market Indicator Price (DMIP) stood above the Lower Intervention Prices most of the time making it unnecessary for INRO to intervene in the market. This has exposed the weakness of INRO mechanism when Asian currencies became weaker Major NR producers could not contribute funds to INRO due to their national economic weaknesses that lowered financial liquidity of INRO Malaysia and Thailand decided to withdraw from membership in 1999

7 Unusual Phenomenon Unusual Phenomenon Coming to the years 1995 – 2007, if we take a look at the annual global GDP growth, it rose steadily from 1995 until 2000 before falling sharply in It rebounded again in 2002 and peaked in It declined slightly in 2005, but bounced back in In 2007, it is expected that the global economy will be slightly lower than 2006 (IMF). In contrast, the average NR f.o.b. price of SIR20, SMR20, STR20 and RSS3 peaked in 1995 and started falling gradually to the bottom in late December It showed a divergence between the annual global GDP growth and the NR prices during 1996 – 2000, but a convergence during 2002 to 2007.

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9 2. The New Era of Tripartite Rubber Countries After the last fall of NR prices in late 2001, the major NR producing countries namely Thailand, Indonesia, and Malaysia decided to cooperate in producing adequate and orderly supply of NR on a continuing and long-term basis to ensure fair and remunerative income for rubber smallholders.

10 The three countries signed the Joint Ministerial Declaration (Bali Declaration) 2001 on 12 December 2001 in Bali, Indonesia to implement two measures below:- Supply Management Scheme (SMS); to cut back 4% in NR production for the year 2002 and 2003 Agreed Export Tonnage Scheme (AETS); to cut back 10% in exports for the year 2002

11 The simple economic principle of the Balance of NR Demand and Supply is applied to sustain the rubber price. In principle, the three countries tried to shift SS1 to SS2 in order to raise the rubber price from OP1 to OP2 during 2002 – 2003.

12 Mechanism of Rubber Supply Management

13 At the same time, the three countries formed International Tripartite Rubber Council: ITRC, which comprises representatives from the respective countries to manage and implement the above two measures and other measures until the present. After the passage of the two supply measures in 2003, the three governments still keep the two measures on hold and realize that there should be a marketing support to stabilize NR prices in the future. On 8 August 2003, the three countries signed the Memorandum of Understanding (MoU) and formed International Rubber Consortium Limited: IRCo on 28 April 2004 to play the role of a Rubber Price Stabilizer in the world market.

14 3. How IRCo Stabilize NR Prices? IRCo will use appropriate marketing tools and measures to stabilize the NR prices if and when necessary under the principle of mutual benefits for both producers and consumers. Suitable tools and/or measures will be disclosed when IRCo has to tackle the rubber market.

15 For the time being, IRCo has set three Key performance Indicators (KPIs) as follows:- Alert Price: is the 14-Daily Composite Price (DCP) of IRCo that signals and warns ITRC and IRCo to be ready for AETS implementation Trigger Price: is the 14-DCP that ITRC and IRCo have to prepare for implementation of AETS Reference Price: is the 14-DCP that IRCo has to implement the Strategic Market Operation (SMO)

16 Benchmarks of Rubber Price Management

17 4. MIS of IRCo

18 5. Conclusion Finally, we would like to say that the cooperation on rubber among Indonesia, Malaysia, and Thailand since 2001 to the present under the supply and marketing management of ITRC and IRCo is successful in stabilizing and sustaining the rubber prices and improving quality of lives, particularly rubber smallholders in the tripartite rubber countries. In addition, we also welcome Vietnam to a member of ITRC soon.