846E.324/3–752: Telegram

The Ambassador in Ceylon (Satterthwaite) to the Department of State


502. Exter Gov Central Bank yesterday gave background and summary recent highest level GOC discussions re rubber agreement. Exter [Page 1511] said GOC taking contract most seriously and on no economic problem with which Exter concerned has PriMin personally spent more time. For example, this week PriMin presided at three very long discussions on subject.

Exter summarized polit background by saying PriMin convinced desirability contract from point view dollar earnings and also has repeatedly stated desire restore cordial relations with US and anxiety find plausible pretext embargo rubber to China as fully aware moral implications GOC present position. PriMin however cannot run very real polit risk being accused selling out Ceylon rubber interests to US which might be case if GOC itself forced buy rubber at any time at lower levels than Colombo open market prices. In other words GOC considers it cld not justify any losses which producers or traders might be forced take as result contract. Embargoing rubber to China undoubtedly will depress market which maximum risk GOC willing take.

Central Bank made day by day analysis relationship over 15 months between Colombo and Singapore prices and found in general prices very competitive. However, variations do occur for such obvious reasons as:

Singapore market highly organized and prices may fluctuate from transaction to transaction, whereas in Colombo auction single price established daily applies to all sales;
Unusual flow rubber into one market or current availability shipping space;
Ceylon rms. No. 1 sheet usually brings fractional premium over Singapore rms. No. 1;
Buying in Ceylon for Commie China causes buoyancy in local prices.

View above reasons Exter after conversations with trade leaders convinced GOC cannot persuade trade agree accept Singapore noon prices as contract basis.

Instructions now being sent Corea along fol lines:

GOC wld make firm commitment deliver average 3,000 tons sheet monthly. Total 36,000 tons wld be delivered over period of year and not necessarily on basis equal monthly deliveries.

GOC wld enter market as agent for GSA only if latter cld not purchase residual balances through normal commercial channels.

GOC wld guarantee deliver residual balances to GSA at price not exceeding 1 US cent per pound above Singapore price.

GOC wld not undertake supply crepe but wld expect GSA purchase crepe as long as differential between crepe and sheet remained below agreed maximum.

Exter emphasized that above proposal represents greatest possible area agrmt between GOC elements opposing contract and those favoring it and is convinced that while some possibility negot exists, perhaps [Page 1512] connection (2) above, in general GOC must have terms substantially as outlined. On basis Central Bank study he considers average 3,000 tons sheet monthly cld easily be handled through commercial channels at prices competitive with Singapore. It is Exter’s considered view that if GSA unable accept proposal along these lines it will be polit impossible for GOC improve terms and that contract discussions must be abandoned.

There are very influential elements in GOC opposed to contract and I consider unlikely PriMin will be able make further concessions. Vaithianathan Perm Sec MEA later called on me and confirmed that instrs tel Corea Mar 6 along lines indicated and that PriMin had serious difficulty obtaining agrmt among colleagues for such terms.

While I fully appreciate necessity conclude contract on sound business basis, at same time in view strategic importance Ceylon and fact there is no satisfactory alternative to supporting present govt, I believe Dept and GSA shld give serious consideration polit factors involved.