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23 January 2019

A Forgotten Producer Price




This article was written by Trevor Tarring. All views and opinions are strictly his own.

The producer price of copper outside the USA about which I wrote recently made its mark on macroeconomic thought at the time (the 1960's). Yet its most effective phase lasted less than five years. The zinc producer price I am now writing about lasted 24 years, yet you will struggle to find much reference to it at all in writings on the broad economy. The years in question were 1964 - 1988.

There are two obvious reasons for this difference. The first is that copper is a much more valuable commodity than zinc. The second is that the introduction of the zinc producer price was something of a "me too" event, coming as it did some 2 ½ years after the start of the decisive phase of the copper producer price story. But it is still a puzzle why it has left so little mark on the economic literature.

As with the copper story, it is one that is unthinkable without the involvement of its main protagonists. These start with the man then known as Mr. J.N.V. Duncan, later Sir Val Duncan, chairman of what was then called Conzinc Rio Tinto following the merger of Australian Consolidated Zinc with the miner of Spanish copper, Rio Tinto (whose chairman he had been). As one who was conscious of his public image, he must certainly have looked with interest at Sir Ronald Prain's fame as father of the copper producer price. At the same time it is arguable that he might not have been able to achieve his objective without the involvement of Alfred Baer, who had been chairman of Consolidated Zinc prior to the merger. Perhaps more usefully, Baer was also a director of Metal Traders, a leading ring-dealing member of the LME and well used to the industry's period pricing contracts based on LME prices. The third name to mention as a "father" of the price is Frank Gregory, Conzinc Rio Tinto's zinc sales director, a shrewd operator famous for being preceded wherever he went by the booming sound of his voice.

With the incisiveness that had allowed them to put together the merger of Consolidated Zinc and Rio Tinto in only three weeks, Duncan and Baer announced their new zinc producer price on July 13 1964; at £125 a ton it was just £1 below the prevailing LME price. With their objective of getting their price written into period pricing contracts in place of the LME price they based it on the same grade as was traded on the LME, namely gob (good ordinary brands) of min 98% purity. This is perhaps surprising, bearing in mind that the LME's retention of that grade was already under question in view of the shift in recent years towards high grade (99.5%) and special high grade (99.99%) as the main industrially-used grades.

They further eased the path for those they wanted to substitute that price for the LME price in their period pricing contracts by declining to define whether the price was cif or delivered. Thanks to the groundwork that had been done to educate the trade on the nature of such producer prices by the copper producers, the new price was adopted as reference in period pricing contracts around the world except, of course, America. And as an LME substitute it was natural for it to be used at all stages of the metal's production, whether as content of concentrate, raw metal or semifabricated product.

Surprisingly the initiative was not so damaging to the LME as the producer price of copper had been, though it certainly deprived it of much of its historic raw metal hedging trade. Partly this was because the producers decided, after looking at the copper story, that it was not profitable to take steps actually to undermine the Exchange. As a result, two parts of historic hedging continued - Communist bloc zinc, which was often marketed by being dumped in LME warehouses, so did not adhere to the producer price, and the zinc content of scrap. Although the main hedging requirement for brass scrap is the 60% of it that is copper, for large processors of scrap like rod mills and extruders there is also a hedging need for the zinc content.     

As the price ran serenely on the surface over the years, changes in the environment were taking place underground. Noticeable only to the producers themselves was an initiative by an arm of the European Commission to try to hang a charge of price fixing on them. This would have been relatively easy in the early stages of the producer price. To ensure one of the founding requirements for the price - that it should always appear as a single figure - changes were initially simply notified to Metal Bulletin by Frank Gregory. As the industry had carried over into the producer price era the old LME-based price-taking practice of contractually referring to "price as published in Metal Bulletin", this was all that was needed. With the Commission's hot breath on its neck, Conzinc Rio Tinto dropped out of the picture and individual producers took care to phase their price change announcements a few days apart from each other. It was left to Metal Bulletin to decide the exact date the change would be reported.

Over the many years the price lasted, various osmotic pressures brought about subtle changes. The initial idea that the basis of the price should not be defined fairly soon gave way to a definition of cif Europe. In the late seventies, under the chairmanship of the LME of Ian Foster, aluminium and nickel contracts were brought in, making LME-based pricing mainstream for non-ferrous metals. A further sea change was the change in the industry's view of die casting. At the beginning of the producer price it was optimistic ideas of the future for die casting as a component of zinc consumption that were a major argument for getting away from an LME pricing basis. Over the 24 years of the producer price these hopes had to be moderated. Perhaps most influential in the end game was the drifting apart of the vertically-integrated and custom- smelting sides of the zinc producing industry.

Despite these signs, it was almost as much a surprise, when the producers declared at the end of 1988 that they were abandoning the price mechanism, as it had been when they introduced it. The LME quietly and gratefully resumed servicing the industry's greater hedging needs and providing its reference price.  

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