So how do you like that free market now?
That's a question rubber company executives might ponder as they try to cope with record-breaking prices for natural rubber. Prices that recently hit $2.60 a pound, compared with 44 cents a pound in mid-2003.
From 1981-1999, global NR pricing mostly was controlled by the International Natural Rubber Organization, the vehicle that implemented a commodity agreement between nations that produced and consumed this vital material. The goal of the organization was to ensure a steady, reasonable return for NR, which encouraged the development of the NR-producing industry. In turn, the customers of NR were promised a secure supply and a price that didn't fluctuate wildly and unexpectedly.
In a larger sense, INRO was a political agreement aimed at helping the economic growth of developing countries, particularly in Southeast Asia. The mechanism to make it happen was a buffer stock—INRO would buy and take off the market NR to keep prices within a certain range, and sell its stockpile when it needed to reduce prices.
As far as commodity agreements go the International Natural Rubber Agreement was highly successful for most of its life. Eventually, some of the rubber-producing members rebelled at low prices in the late 1990s, while the concept of a commodity agreement didn't jive with consuming nations' love affair with free market economics. INRA fell.
So where is the world today, without such a commodity pact? The free market is operating as advertised—supply and demand rule. Demand for NR, particularly from China, and a lack of production because of weather-related issues, has caused scarcity and higher prices.
The market is deciding, and it is deciding against the small rubber compounder, the mid-sized molder, even the big tire companies and ultimately their shareholders.
At least for now, the dark side of the free market is casting a shadow over consumers of NR.