WORLD NATURAL RUBBER PROSPECTS: A CASE STUDY OF LDC COMMODITY PROBLEMS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00283R000400050008-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 16
• Document Creation Date: December 22, 2016
• Document Release Date: February 23, 2010
• Sequence Number: 8
• Publication Date: January 1, 1984
• Content Type: REPORT

Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
Directorate of
Intelligence
World Natural Rubber
Prospects: A Case Study of
LDC Commodity Problems
An Intelligence Assessment
ON FILE DEPT OF TREASURY RELEASE
INSTRUCTIONS APPLY
Confidential
Confidential
GI 84-10011
January 1984
Copy 4 3 3
Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
 Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
 Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
OGI, o
Comments and queries are welcome and may be
directed to the Chief, Commodity Markets Branch,
Confidential
GI 84-10011
January 1984
Directorate of Confidential
Intelligence F 11
World Natural Rubber
Prospects: A Case Study of
LDC Commodity Problems
This paper was prepared by
Commodity Markets Branch,
25X1
25X1
25X1
Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
 Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
World Natural Rubber
Prospects: A Case Study of
LDC Commodity Problems
Cnnfidnntiol
Key Judgments In many ways the plight of the natural rubber industry represents in
Information available microcosm the problems many less developed countries (LDCs) are or will
as of December 1983 be facing on the commodity front. As with many basic raw materials,
was used in this report.
Third World rubber producers have been buffeted both by technological
advances and by changing market demand:
? Markets are being eroded substantially by new technology. Synthetic
rubber, developed during World War II, now accounts for 70 percent of
the overall rubber market. Sugar, cotton, copper, and tropical timber are
increasingly facing this challenge.
? Shifting demand, caused by energy conservation efforts and changing
tastes, has reduced markets. The downsizing of cars, increased use of
mass transit, and longer wearing tires are cutting back natural rubber
use. Similar consumption shifts are hurting demand for other commod-
ities such as coffee and tin.
Natural rubber producers as a group have, to date, been unable to develop
a viable approach to meet these challenges. Rather than finding ways to
adjust to market conditions, they have:
? Generally pushed toward greater production in an already glutted
market.
? Pressed on the international front for price and export controls adminis-
tered through international commodity agreements.
So far, this type of strategy has failed to solve the problems that LDC pro-
ducers face.
Nevertheless, commodity-dependent LDCs across the board will continue
to press the United States for:
? Greater financial help in the form of short-term credits, long-term
development loans, a greater US sharing of buffer stock financing, and
purchases at subsidized prices.
? Wider access to US markets, on a preferential basis if possible.
? Greater use of international commodity agreements, citing US and
European Community tendencies to impose protectionist measures to the
LDCs' relative disadvantage. 25X1
Confidential
GI 84-10011
January 1984
Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
 Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
US policymakers will have to weigh the short-term gains of such conces-
sions against their longer run impact. While greater support for multilater-
al commodity agreements may temporarily ease LDC earnings problems,
such actions, unless coupled with realistic adjustment policies, run the risk
of perpetuating the basic problem of most commodities-excessive produc-
tion. Eventually, the LDCs will have to begin restructuring their economies
away from basic commodities and raw materials. In that event, requests by
LDCs for development loans and market access could provide the United
States with opportunities for influencing the direction of change.
Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
 Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
Confidential
Key Judgments
The Backdrop
Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
 Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
Confidential
World Natural Rubber
Prospects: A Case Study of
LDC Commodity Problems
A key factor behind the problems of the debt-troubled
less developed countries (LDCs) has been the falloff in
their export earnings caused by the recession in
Organization for Economic Cooperation and Develop-
ment (OECD) countries. The steep slide in nonfuel
commodity prices-the most severe and prolonged
since World War II-together with sizable declines in
export volumes, severely crimped revenues. Among
key LDC debtors, nonfuel commodities account for as
much as 80 percent of total export earnings.
Evidence that the US recovery was under way
sparked a rally in commodity prices early in 1983.
The Economist's price index of industrial materials
by August jumped 20 percent, as compared to Decem-
ber of the previous year. Many individual commod-
ities performed considerably better. Natural rubber
prices, for example, advanced 40 percent. The price
rise was touched off by speculators anticipating a
strong surge in commodity demand such as that which
had followed other recessions. Since August, however,
prices have settled back, and prospects for an export
turnaround on the commodity front are now consid-
ered poor at best by most trade sources. Agricultural
surpluses are huge, and carryovers-especially for
wheat, sugar, and coffee-will keep farm prices de-
pressed.' As for raw materials, excess metals produc-
tion capacity, large inventories, and changing demand
patterns are likely to hold the price recovery below
prerecession levels for many months.
How well LDCs do over the next several years will
depend in part on the pace and magnitude of recovery
in the severely depressed nonfuel commodity markets.
While each of the dozens of individual commodities
has its unique market problems, most share a wide
range of similar obstacles. To gain insight into the
hurdles facing LDC commodities exporters, we have
selected natural rubber for detailed analysis.
Rubber: A Case Study
Natural rubber's difficulties are symptomatic of the
problems facing most commodities. In the mid-1970s,
industry experts predicted a great future for rubber
because:
? Skyrocketing oil prices would bring competition 25X1
from synthetic rubber to heel. The market share of
natural rubber in the United States-which had
skidded downward for two decades-rose from 22.5
percent to 26.5 percent in the mid-1970s. Industry
analysts predicted it would rise to 35 percent over
the next decade.
? Giant strides being made in natural rubber produc-
tion technology promised to boost yields by as much
as 50 percent.
? The Association of Natural Rubber Producers was
formed to share technical knowledge and marketing
arrangements. Initial steps were taken to form an
International Rubber Agreement under the UN
Conference on Trade and Development
(UNCTAD).
? Enormous surpluses that plagued other commodities 25X1
such as copper and sugar were avoided by natural
rubber producers. This offered the hope of a reason-
able rate of return on investment.
25X1
These prospects went largely unfulfilled. In the past
few years, the outlook has soured. A key problem was
the drop in demand and price caused by prolonged 25X1
recession in the major OECD markets. From a record
Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
 Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
high of 80 cents per pound in 1980, rubber prices
plunged nearly 50 percent by November 1982, severe-
ly crippling export earnings
While more than 95 percent of all natural rubber is
produced in a handful of LDCs, not all natural rubber
producers were equally hurt (see table). Thailand and
Sri Lanka benefited from expansion projects that
began in the late 1970s, which enabled some increases
in export volumes. Even so:
? Thailand's earnings from natural rubber fell from
1980 to 1982 by nearly one-third to $413 million
even though sales volume grew nearly one-fifth.
? Sri Lanka's export earnings from natural rubber
fell to $112 million in 1982, 30 percent lower than
the peak level reached in 1979. This occurred
despite a 2-percent increase in sales volume.
Other producers had to bear the full brunt of the
recession:
? As compared with 1980, Malaysia's 1982 export
earnings from natural rubber fell by $983 million to
$1,137 million, the lowest level since 1975.
? Indonesia's sales of natural rubber brought in an
estimated $602 million in 1982, down more than
$560 million from the peak year of 1980.
? Liberia's estimated export earnings of $50 million
from natural rubber in 1982 were the lowest in
nearly a decade.
After previous recessions, exporters experienced a
sharp rebound in shipments and prices. Producers
may, however, be in for a major disappointment this
time around. For example, the demand factors that
caused the recent falloff in consumption seem likely to
continue throughout the current recovery. Beyond
1983-84 the outlook for world economic growth is
bearish. Wharton forecasters, for example, believe
growth will average roughly 3 percent per year over
the next decade, as compared with the 5.5-percent
rate recorded from 1960 to 1973. For natural rubber,
this slowdown in the global economy suggests a long-
term demand growth rate of at best about 1.5 percent
per year, less than half the 1961-79 average.2F_~
Natural rubber producers cannot look to nonmarket economies as
an outlet for increased sales. Examination of rubber trade statistics
shows sharp declines in natural rubber imports by the USSR,
Eastern Europe, and China over the past decade. These declines
result from demand shifts toward synthetic rubber usage in all of
these countries, as well as from a sharp increase in natural rubber
Selected LDCs: Millions US $
Rubber Export Earnings
Malaysia
Indonesia
Thailand
Sri Liberia
Lanka
1976
1,282
530
260
105
53
1977
1,373
588 ?
302
102
59
1978
1,555
717
394
- 129
69
1979
2,048
937
605
160
88
1980
2,120
1,165
603
157
102
1981
1,611
828-
497
150
89
1982
1,137
602
413
112
508
Source: "International Financial Statistics," International
Monetary Fund, 1984.
Even if the rate of world economic growth and the
demand for rubber by the transportation sector in-
crease more than expected, natural rubber may not
benefit because of two major roadblocks:
Markets are being eroded substantially by new
technology. If anything, competition from synthetic
rubber, which already holds 70 percent of the
rubber market, will intensify (see figure 1). Declin-
ing profit margins have forced synthetic rubber
producers to become even more efficient, to pursue
research and development of new production tech-
nologies, and to develop new products and markets.
? Shifting demand, caused by energy conservation
efforts and changing tastes, has reduced markets.
Because of the downsizing of cars, increased use of
mass transit, and longer wearing tires, natural
rubber use has been decreasing.
Of these two factors, we believe the challenge from
synthetics is more significant. Synthetic rubber pro-
ducers are in a better position to expand output
rapidly because nearly one-third of their capacity is
unutilized at present, according to industry data. As
long as oil prices remain relatively stable, prospects
25X1
25X1
Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
 Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
Confidential
Figure 1
Natural and Synthetic Rubber at a Glance
Synthetic 53%
World Production, 1982 (Natural Rubber)
Total: 3.8 million metric tons
Natural 31%
4 1 64
World Consumption, 1982 (Natural Rubber)
Total: 3.7 million metric tons
India 5%
e
.
EC
are bleak for natural rubber producers gaining any
long-term price advantage that could reverse the shift
toward greater usage of synthetic rubber.
Much of the past rapid rise in the share of synthetics
occurred because natural rubber producers proved
incapable of supplying global rubber demand in-
creases in the 1970s of about 7 percent. It takes five to
seven years from time of planting until rubber trees
become productive. In contrast, industry statistics
show that a synthetic rubber factory can be brought
on stream in only two years.
Synthetic rubber producers are also helped by greater
price stability. Natural rubber supply is very insensi-
tive to price movements in the short term, causing
prices to fluctuate widely whenever changes in eco-
nomic activity induce even small shifts in demand.
Natural rubber's price instability creates a great deal
of uncertainty for manufacturers in terms of their
production costs, discouraging its use. Moreover,
backward integration by tiremakers into synthetic
Japan 12%
1
P
China &81 Ot
her 32%
Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
 Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
Confidential
rubber production and forward integration by petro-
chemical producers into the same activity further
encourage the production and consumption of syn-
thetic rubber rather than natural rubber
Production
Natural rubber producers as a group have failed to
develop a winning strategy to meet the rising tide of
synthetic rubber in a stagnating market environment.
While there have been some shifts from rubber to
other tree crops such as palm oil, and, while invest-
ment funds have been harder to come by because of
the debt situation, the natural rubber producers have
generally stayed the course toward greater produc-
tion. For example, during 1972-77 world natural
rubber production grew at a 3-percent annual rate;
much of the increase during the period resulted from
investments in the late 1960s. With the exception of
Thailand, however, investment in natural rubber since
the early 1970s has slowed. Because of this, rubber
output in recent years has increased less than
1 percent per year. Investment projects now under
way, while appearing ambitious, are aimed primarily
at maintaining this level of output growth:
? Thailand has already successfully implemented its
program to replant 160,000 hectares. As a result,
industry experts expect output to grow by 20 per-
cent between 1982 and 1985.
? Indonesia announced in 1979 a plan aimed at
replanting 250,000 hectares in the smallholder sec-
tor between 1981 and 1985. Furthermore, Jakarta
has recently announced that it will open up new
areas to encourage planting of 180,000 hectares on
some of the smaller islands. These two programs
together could add about 15 percent to Indonesia's
rubber output by the early 1990s.
? Malaysia has already begun implementing plans
that call for some 50,000 hectares of new plantings
each year from 1981 to 1985, about double the rate
achieved in the 1970s.
Looking at these programs together, we estimate that
after the temporary 4-percent production surge in
1983-caused in large part by intensified tapping in
response to the short-lived commodity price runup
early in the year-world natural rubber production is
likely to return to about a 1-percent annual rate of
growth over the remainder of the decade. While both
new plantings and replantings probably will be about
50 percent more productive than the majority of the
trees now producing, the net additions to total world
rubber acreage will be small-probably less than
5 percent. Indeed, most of the planting must be
carried out simply to keep output from declining.
Institutions
To protect export earnings in the face of declining
prices, commodity exporters have traditionally pushed
for price and export controls administered through
various international commodity agreements. Such
has been the case with natural rubber. The Interna-
tional Natural Rubber Agreement (INRA), which
came into effect in 1980, is the first in a series of UN-
backed commodity agreements designed to raise and
stabilize commodity prices and export earnings.;
At roughly the halfway mark in the first five years of
its scheduled operation, the INRA has experienced
more problems than successes:
? Buffer stock purchases have failed to keep prices
from falling below the "must buy" band: they have
had to be suspended because of a shortage of funds.
Members are refusing to give additional money for
this purpose, according to trade journal reports.
? The large quantity of rubber already in the official
INRA stockpile-about 260,000 tons-is having a
depressing effect on the recovery of rubber prices.
According to industry reporting, potential buyers
fear that if economic recovery is strong enough the
price could reach the ceiling level at which the
buffer stock manager must begin to sell off stocks.
? Rubber price fluctuations have not been appreciably
reduced. In the first three years of the agreement,
average yearly fluctuations have been about 25 25X1
percent, greater than the average of the last 10
years.
Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
 Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
Confidential
More important, the key producers cannot agree on
the future course of action. According to a Depart-
ment of the Treasury report, Malaysia, which pro-
duces nearly twice as much rubber as its nearest
competitor, is pushing for renegotiation of the current
agreement, which expires in October 1985. Reported-
ly, Kuala Lumpur would like to have a new agreement
based on production and export controls rather than
on a buffer stock. This would serve to guarantee
Malaysia its current market share in the face of
stagnating output. The same source reports that Indo-
nesia and Thailand, with greater growth potential, are
pressing to retain the buffer stock but with higher
floor and ceiling prices.
In our view, these issues will become more hotly
contested at future INRA meetings as negotiating
positions are prepared for the first UN Rubber Rene-
gotiating Conference, scheduled for June 1984. If
anything, the slow pickup in rubber demand will
generate further strains. According to estimates by
the EIU, natural rubber demand in 1983 probably
rose only 3 percent over the depressed level of 1982.
Production, however, grew by about 4 percent, boost-
ing world stocks to a new high of about 1.7 million
tons, some 45 percent of annual world consumption.
Technology
In our judgment, natural rubber producers have not
fully utilized the production technology at their dis-
posal. Their failure to make wider use of production
enhancement techniques to increase efficiency and
lower costs has contributed over the years to natural
rubber's long-run price disadvantage vis,-a-vis synthet-
ics.
Latex yields could be increased dramatically by plant-
ing new varieties of trees. Yields in the producing
areas of Southeast Asia range from 500 to 1,200
kilograms per hectare per year. High-yield trees
already commercially available could more than dou-
ble yields to 2,500 kilograms. According to EIU,
yields of 7,000 kilograms per hectare per year are
possible through greater use of more sophisticated
mutation breeding and tissue culture techniques. The
low yields at present are caused by the large number
of older trees that are still being tapped, the immatu-
rity of newly planted trees, and the slow replanting
rate.
Increased use of chemical stimulants could also in-
crease rubber output. Stimulants are used only on
trees more than 15 years old, proving especially
valuable on those nearing the end of their productive
lives. Ethephon, the most widely used stimulant, has
improved yields by as much as two-thirds. Other more
effective stimulants are also available. Stimulation
can be used either to increase yields while maintain-
ing tapping frequency and intensity or to maintain
yields while reducing tapping. The latter permits
considerable labor savings.
Lessons From the Rubber Experience 25X1
Over the long haul, technology is likely to be the bane
of the LDC commodity producers in general. Just as
the development of a wide range of inexpensive
synthetics has cut sharply into natural rubber's tradi-
tional markets, new processes, techniques, and prod-
ucts are displacing other traditional commodities in
the marketplace, some at an astonishingly rapid pace.
For example:
? The sweetener market has been radically trans-
formed by the introduction of a continuous enzy-
matic process for mass production of high fructose
syrup made from corn (HFCS). Industry analysts
predict that HFCS consumption in the United
States will have captured 29 percent of the domestic
caloric sweetener market by 1985 or 1986. This
trend will soon spill over to the other OECD
countries, greatly hurting world sugar demand.
? Optical fibers made of silicon glass are outcompet-
ing copper wire in communications applications 25X1
because of their greater message-carrying capacity.
? Composites (fiber-reinforced plastics), single crystal
and amorphous metals, and ceramics are displacing
traditional materials such as iron and steel, alumi-
num, cobalt, and superalloys in aircraft and auto-
mobile bodies and engines. The technology to build
an airframe entirely out of composites has already
been demonstrated. The rate at which these exotic
materials penetrate the metals market now depends
only on their economics.
Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
 Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
Confidential
Thailand's steady growth in natural rubber produc-
tion is largely attributable to new plantings. Bangkok
has successfully implemented its Accelerated Re-
planting Project of 1977-80. Under this program,
Thai producers replanted 160,000 hectares-25,000
in the first year, 35,000 in 1978, and 50,000 per year
in 1979 and 1980. As a result of this aggressive
program, industry experts expect production to grow
to 700,000 tons per year by 1985, a 25 percent
increase over 1982 output. Further replantings later
in the 1980s are already called for. The government
has announced plans to replant as much as 250,000
hectares. In addition, industry observers expect gov-
ernment land-settlement schemes to open up 16,000
hectares of new acreage by 1985.
In addition to the replanting program, Bangkok
provides incentives in the form of replanting grants
and technical assistance to smallholders, so that
they do not switch to other crops when their rubber
trees reach very low levels of productivity. The
priority given to the rubber sector is reflected in the
size of the grants for replanting. According to the
Economist Intelligence Unit (EIU), in 1979 the grant
stood at M$2,035 per hectare for rubber, as com-
pared with $1,089 for other crops. To date, this
policy has been effective; only 5 percent of recent
replanting has been with other crops. Nevertheless,
prospects for continued success will hinge largely on
government support for the smallholder sector and
the availability of financing. If economic conditions
do not pick up substantially, the leadership in Thai-
land will probably cut back on aid to natural rubber
producers.
Indonesia announced in 1979 a seven-year plan
aimed at replanting 300,000 hectares in the small-
holder sector-20,000 in 1979, 30,000 in 1980, and
50,000 per year in 1981-85. Under the program, the
government covers 35 percent of the costs, with the
remainder financed by loans from the World Bank.
Smallholders receive a replanting grant of $1,200
per hectare, and the government funds its contribu-
tion from a special tax on natural rubber
exports.
Indonesia has also announced that it will open new
areas to rubber cultivation. According to recent gov-
ernment statements, the intention is to broaden the
natural rubber base by encouraging plantings of
180,000 hectares on some of the smaller islands. This
strategy is not confined to natural rubber but em-
braces a number of other crops. It is being carried out
in conjunction with the transmigration program, de-
signed to resettle some one-half million families.
Some new planting is also envisaged on existing
smallholdings, for which the World Bank has extend-
ed an additional $5 million loan.
Indonesia is currently feeling the impact of reduced
replantings in the past. Production growth over the
next few years will be sluggish at best. Moreover,
yields are the lowest of the big three producers;
according to EIU statistics, yields in Malaysia, for
example, are about 80 percent higher than in Indone-
sia. Yields on small farms, which account for about
two-thirds of Indonesia's rubber output, are particu-
larly low, and productivity is expected to continue to
decline. There will probably be a decline in produc-
tion from these farms until 1985, when the payoff
from current government programs starts. There
could, however, be a small spurt in total output this
year as higher prices for natural rubber encourage
some increased tapping. Declining or stagnating oil
and gas revenues-which accounted for three-fourths
of Indonesia's export earnings last year-will place
increased strains on domestic spending. This, in turn,
25X1
Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
 Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
Confidential
could jeopardize the success of Indonesia's rubber
project.
Malaysia's rubber production policy is currently
aimed at accelerating output, based on replanting with
high yielding trees and on land development schemes
to increase acreage. Kuala Lumpur has already begun
implementing plans that call for some 50,000 hectares
of new plantings per year from 1981 to 1985, about
double the rate achieved in the 1970s.
Other measures currently in effect to encourage pro-
duction include: a redress of the imbalance of the
export duty on rubber, as compared with competing
crops; the creation of a credit fund for smallholders
to foster wider adoption of research innovations; the
creation of a plantation development corporation to
assist government agencies in developing new rubber
estates on a commercial basis; and an intensification
of rubber research and development through the
Malaysian Rubber Research and Development
Board.
In response to depressed prices, changing rubber
consumption patterns, and austerity budgets, Kuala
Lumpur has.begun to review its rubber policies.
Datuk Paul Leong, Minister of Primary Industries,
recently announced the formation of a review com-
mittee that will look into supply and demand in the
rubber market over the next two decades. If Leong's
public statements are any guide, the group will
recommend how much land and capital Malaysia
should devote to rubber cultivation. Given the severe
labor shortage in Malaysia and the government's
determination to pursue a capital-intensive industri-
alization policy, the rubber industry is likely to
become less important to Malaysia's economy in the
years ahead.
? Manmade fibers have revolutionized the markets
for thread, cloth, yarn, carpeting, and upholstery.
DuPont's improvements in polyesters in the 1950s-
as well as in nylon, aramids, acrylics, and modacryl-
ics-have led to major inroads in the markets for 25X1
traditional cotton, wool, and silk fibers. From only
2 percent in the 1950s, manmade fibers rose to 44
percent of total world fiber output in 1982. In the
United States, synthetics now hold 75 percent of the
overall textile market. The easing of oil prices will
help keep synthetics cost competitive.F~ 25X1
The LDCs, in response to this technology onslaught, 25X1
have continued to push for commodity agreements
incorporating price controls, buffer stocks, quotas,
and other market-sharing devices, not only in rubber
but in most commodities. Under the aegis of the
UNCTAD Integrated Program for Commodities, the
LDCs hope eventually to bring 18 key commodities
under some form of control, financed by a $6 billion
Common Fund. While the International Natural
Rubber Agreement is the only commodity agreement
established through UNCTAD's efforts, talks and
negotiations are continuing for cotton, hard fibers,
jute, tea, tropical timber, bananas, and bauxite.
The INRA problems serve to illustrate some of the
deficiencies of all commodity agreements. These
include:
? Direct cost-industry specialists estimate, for exam-
ple, that a 500,000-ton buffer stock would be needed
to defend a 10-percent price band for rubber. At 50
cents per pound, the cost would be more than $550
million.
? Inefficiency-commodity agreements that rely on
quotas based on historical production or export
averages to allocate market share tend to penalize
new, more efficient entrants into the market.
? Indirect cost-since the effect of most commodity
agreements is to raise the long-run average price
above what it would otherwise be, they raise the cost
to all consumers of products using the controlled
commodity.
25X1
25X1
Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
 Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
Confidential .
The Threat From Technology
The near monopoly position enjoyed by natural rub-
ber in the first half of this century was effectively
dissolved by the rapid introduction of synthetic rub-
ber since World War II. The United States, cut off
from its main sources of natural rubber in Southeast
Asia during the war; launched a crash synthetic
rubber development program in the mid-1940s. Re-
newed Jears of rubber shortages during the Korean
war stimulated a technological breakthrough-cold
polymerization-in the production of synthetic sty-
rene-butadiene rubber (SBR), which made it techni-
cally and economically competitive with natural rub-
ber. SBR is now the dominant rubber used.
While natural rubber is preferred in uses where heat
and cracking resistance, tensile strength, and adhe-
sion to metal surfaces are important, these uses
account for only 20 percent of the total rubber
market. Synthetic rubber's properties make it pre-
ferred in 30 percent of rubber's applications, leaving
about one-half of the market to be allocated on the
basis of price comparisons. Natural rubber's current
market share is about 30 ercent, having fallen from
nearly 70 percent in 1950.~~
From about 1950 to the early 1970s, synthetic rubber
prices fell steadily as a result of technological. break-
throughs, economies of scale, and stable oil prices. As
synthetic rubber became progressively more impor-
tant in world markets, its price held down the price of
natural rubber. Since at least the early 1970s, syn-
With no viable alternatives, the LDCs are stuck with
pushing a failed policy. For most producers, the
costs-both economic and political-of shifting from
raw materials with a dim future are simply too high,
especially given their current financial bind. More-
over, any adjustments would come at a time when
governments in the debt-troubled LDCs are being
asked by the IMF to tighten their belts until they can
get their economies more in order.
thetic rubber has been cheaper than natural rubber
(figure 2). The gap has been as much as 40 cents per
pound at times and currently is 15 cents per pound.
This price advantage was thought by natural rubber
producers to have ended when synthetic rubber prices
surged past natural rubber prices in late 1974 as a
result of the first oil shock. These hopes were short
lived, however, as recession cut back natural rubber
consumption while inflation in the form of sharply 25X1
The dependence of tire manufacturers on synthetic
rubber encouraged them to integrate backward into
the rubber industry, whereas the similarity between
the technical processes of synthetic rubber production
and those of petrochemical production offered chemi-
cal producers a considerable incentive for forward
integration. Tire manufacturers and petrochemical
producers, therefore, now dominate the production of
synthetic rubber outside the centrally planned econo-
mies. The petrochemical industry alone appears to
control more than 50 percent of the existing produc-
tion capacity of synthetic rubber in the developed
West, and the tire manufacturing industry owns
another 40 percent. As a result of this captive produc-
tion capacity, many manufacturers have a great
incentive to use synthetic rubber wherever possible.
Within this framework, US policymakers will be
challenged by frequently conflicting goals. While US
support for additional multilateral commodity agree-
ments might ease LDC earnings problems in the short
run-and could be done in many cases at relatively
low cost-such policy actions would perpetuate the
Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
 Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
Confidential
Figure 2
Rubber Prices, 1972-83
0 1972 75
basic problem of most commodities-excess supply.
Indeed, the situation will only worsen as technology
shifts demand away from basic commodities and raw
materials
Eventually, the LDCs will have to begin the painful
steps to restructure their economies. Although we
doubt they will give up entirely on their push for
commodity agreements, LDCs will primarily be seek-
ing US support in the form of development financing
and market access for the products they produce in
place of commodities. When that time comes, the
nature of the challenges for US policymakers will
change, providing opportunities to influence the direc-
tion of the restructuring.
9 Confidential
Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
 Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1
Confidential
Confidential.,
Sanitized Copy Approved for Release 2010/02/23: CIA-RDP85T00283R000400050008-1