Tin Crisis - Part One
This article was written by Martin Hayes. In it, he looks with the eyes of a news correspondent at the events described last week by John Wolff from the point of view of a senior LME Board Member. All views and opinions expressed in this piece are strictly Martin’s own.
On Thursday October 24, 1985, just before 9am, I walked into the main entrance of Plantation House, Fenchurch Street in the City of London. Fifteen yards down the corridor on the left-hand side were the two doors that led into the London Metal Exchange – its trading floor and, overhead, its boardroom and viewing gallery.
I passed the exchange – deserted at this time of day apart from the commissionaire – and ten yards further on the right-hand side entered the Reuters City Office. This was the base for the journalists and clerks who covered the multitude of London’s floor-based commodity and financial markets – cocoa, coffee, sugar, rubber, the International Petroleum Exchange, the Baltic Exchange, and of course, the LME.
I was very much a junior reporter then – I backstopped on all the markets when the senior specialists were away or tied up. This week, I was assisting on metals, where the travails of the LME tin market were the developing story. Today, tin was to become not just another story, but a once-in-a-lifetime event-changer.
I did not know that then, as I said good morning to the two experienced metals journalists who sat just inside the front door – Chris Piper and Don Bradshaw – and asked what was going on. Don said the market looked flat – they had to yet to make their pre-market calls.
“Oh – Pieter de Koning has rung a couple of times for Douglas. Won’t say what he wants,” Don added.
Douglas Learmond was the City Editor – our boss – and today he was running late
De Koning was the most powerful man in the global tin market – he was the Buffer Stock Manager (BSM) of the International Tin Council, charged with supporting the price of tin. He rarely talked to reporters, certainly not to me, but he had a close relationship with Douglas and they spoke often. We would have to wait a little while longer to see what de Koning wanted.
In the meantime, I sat down at my desk and switched on the Reuter Monitor and keyed in the code RING on the green screen. This page showed indicative quotes from LME brokers, and this morning they all looked flat to slightly lower. Many of the brokers had their own input pages – leading ring-dealer Rudolf Wolff was one – so I entered WLFA. This was a useful page that showed the trades they had either made or picked up.
The trade flow for copper, aluminium, lead, zinc and nickel confirmed the impression from the indicatives. But on tin, there was a soft trade of £8,140 per tonne. This was some way below the level that the BSM was mandated to intervene and defend, as well as the previous day’s close of £8,350.
However, this was not particularly unusual. The BSM had done this before and let the market drift. But then as business picked up in the open-outcry rings, he would dramatically support and lift prices with widespread ‘buy-orders’ through multiple dealers. Probably, that was what we would see later that Thursday – so we thought.
De Koning may have had no luck in talking to Douglas yet, but he had already made one call elsewhere in Plantation House - to the LME’s administrative offices located in another part of the building.
It was a short call to the LME’s first-ever Chief Executive, Michael Brown, who happened to be meeting Ted Jordan that morning. Jordan was Chairman of the LME Committee – the practitioner body comprised of senior market figures that oversaw the LME and its operations.
De Koning kept pleasantries to a minimum and got straight to the point – he was suspending trading. After putting down the phone, Brown promptly called Jacques Lion, who was Chairman of the LME Board – its formal governance group. The three men – the troika of the LME’s top decision-makers – talked quickly, made their decision, and then Brown put together a brief notice.
Leaving the LME’s small suite of offices, Brown took the lift to the ground floor, walked through the corridor that backed on to the LME’s trading floor, and came into our office.
Now Mike Brown was an ebullient, larger-than-life character, who, before he became one of the LME’s most important personalities - he had headed up trading firm Lonconex - had actually started his working life at Reuters reporting on commodity markets. He would often exchange good-natured banter with Chris Piper - no respecter of status or reputations - who habitually pointed out he was a failed rubber market reporter.
Today, however, he was in no mood for jokes.
“Morning, chaps – you might want to put this notice out,” he said, handing over a piece of paper to Chris. With that he turned on his heels and left our office.
Back then in the days before websites, emails and 24-hour rolling news, when the LME had notices to issue, they would either send them out in the post to members, put them on the notice board on the market floor, or make some calls to as many members as possible – all of which took time and was inefficient.
So, on October 24, 1985, the quickest way to ensure the market, the industry and the wider financial market-place was appraised of what was going on was to place the news with Reuters, who had a monopoly where electronic news was concerned with Monitor terminals in the offices of virtually every major financial institution worldwide.
Chris, Don and I looked at this historic notice: De Koning had suspended the BSM support operation, and consequently the LME was halting trading in its tin contract with immediate effect.
That was how Reuters got the scoop and the biggest newsbreak in metals for years. That was, memorably, the day and the moment that marked the start of the Tin Crisis. Nothing would ever be the same again for the LME, the tin market, and, indeed, international obligations solemnly undertaken and signed by sovereign states.
And at the same time, the phone was ringing yet again in Douglas’s office – it seemed with more urgency now. So that was what de Koning wanted to talk about.
Now some background on how this situation had unfolded. At the heart of the crisis was the unravelling of a multi-national market support operation carried out for decades under the auspices of the ITA (International Tin Agreement).
Tin was just one of several post-war commodity agreements, where both producers and consumers agreed to support prices at higher levels than would otherwise have prevailed in a truly open market. This was through a combination of export controls or, as in tin’s case, absorbing excess metal in a stockpile – the Buffer Stock.
There were similar altruistic agreements in those post-war years in many other commodities, such as coffee, cocoa, rubber, and to an extent, sugar and wheat. These, crucially, all differed from OPEC, which was a pure oil-producer cartel, and end-users were not involved.
The first International Tin Agreement, which created the ITC, was signed in 1954, came into place in 1956, and then renegotiated every five years. By the early-1980s, when the sixth agreement was being drawn up, the BSM had extensive powers to build a buffer stock, make forward trades, borrow using tin as collateral, but was having to support a sterling-denominated price in Malaysian ringgits, with all the currency risks that carried.
But changing economics and political shifts - monetarism and free-market ideology - led to discord when it came to drawing up the sixth agreement. This was eventually and belatedly cobbled together in 1982, but its muddled outcome contributed to the ITC’s problems - the US and Bolivia pulled out, with the former making sales of tin from its strategic stockpile.
In 1982, too, a ‘mystery buyer’ emerged in LME tin, driving up prices significantly. The buying emanated from Switzerland through trading company Marc Rich, creating a steep cash backwardation on the LME. In mid-year, the LME intervened by putting a limit on the backwardation, which speedily contracted, while prices fell sharply - some £2,000 per tonne.
In fact, the ‘mystery buyer’ was none other than the Malaysian government, in response to the US stockpile sales. The subsequent price fall hurt producers, soured Malaysian-LME relations, but, critically, led to de Koning’s risky activities in the next few years.
Between 1982 and 1985, the ITC’s share of global tin production fell from over 71 percent to just above 55 percent, while currency changes meant that the BSM’s floor price rose from around an equivalent £7,000 per tonne to near £10,000. The upshot was it was harder to control the market, and more expensive.
It all came to a head in 1985, when de Koning was juggling several balls at once. Prices had actually been near record highs of some £9,000 in January, allowing the BSM increasingly to borrow from banks and brokers using paper profits from forward tin already purchased. The market, however, was under pressure from over-supply, and currency shifts, as sterling rose against the dollar - prices fell throughout the year.
Worries about the liabilities being run up resulted in the UK Bank of England informally making the LME aware that the UK would not step in to cover ITC debts. The LME, too, had concerns, as there were rumours the ITC’s funds had been exhausted. But it had no jurisdiction over a non-member customer - after all, the ITC was a multi-national sovereign organisation, good for its liabilities, surely?
In March 1985, de Koning received formal approval to operate below the support price, while in the summer he asked for, and was also promised, fresh funds of some £60 million from ITC member states as a condition to secure additional loans from creditor banks.
That money never turned up, and by October as rumours swirled that at least one LME member was refusing to offer the ITC a further credit line, the banks pulled the plug, and de Koning made his fateful telephone call.
When the music stopped, the BSM held 52,540 tonnes of tin in his own name, controlled 26,845 tonnes held in the name of banks and brokers, while his forward purchases totalled 63,504 tonnes. After adjustments for contracts already priced, the ITC had 120,819 tonnes of tin, or some 75 percent of world consumption, which was losing value by the minute. The total controlled was actually in excess of the BSM’s permissible limit – which implied that some of his activity was unauthorised.
The ITC had debts to many major banks, including Hambros Bank, ABN Bank of the Netherlands, Bank Bumiputra of Malaysia, Chase-Manhattan, Shearson-Lehman and Standard Chartered, as well as 14 of the 28 LME ring-dealers.
The bottom line was that on 24 October 1985, ironically United Nations Day, 22 sovereign member states, including the world’s major producers and consumers of tin, defaulted on their financial obligations standing at an enormous £900 million, or $1.4 billion.