Extract 2

The price of natural rubber has fluctuated greatly over the past decade. Yesterday it reached 1.18 per kilo, a 22-year high in the market, responding to a combination of demand and supply factors.

China's economy is consuming vast quantities of natural rubber as living standards and the demand for motor vehicles rise. Natural rubber and synthetic rubber are in direct competition with each other: last year's production of natural rubber was 8.7 million tonnes compared to 11.9 million tonnes of synthetic rubber. The cost of producing synthetic rubber has also risen significantly due to the high oil price.

Matters have been made worse by poor weather in Thailand, Malaysia and Indonesia, which between them produce 60% of the world's natural rubber. The shortfall in production of natural rubber is likely to continue in the foreseeable future, says the

International Rubber Study Group, which predicts a deficit of 820,000 tonnes by 2010, up from 250,000 tonnes this year. This has led to speculative buying of natural rubber.

Discussions on stabilising natural rubber prices through a buffer stock scheme have takenplace. However, little progress has been made since the failure of the International Rubber Organisation seven years ago due to the growth in competition from synthetic rubber. Buffer stock schemes rely on the participation of all major producers as well as sufficient funds to finance surplus production. They also require spare stocks in times of shortage. However, with rising prices there is little incentive to enter into such agreements.

• Assess the likely impact of the rise in price of natural rubber for consumers of natural rubber such as car manufacturers. (12)