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28 November 2018

Far Away and Long Ago



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

As one or two recent pieces in this series have gone fairly far back in history, I thought it might be interesting to go back to the days of the Ark, just after I started at Metal Bulletin. The tipping point for this story was in 1953, when the artificially drawn out wartime closure of the LME copper ring came to an end and with it the industry's practice of pricing copper on the "Export" averages of the US " E & MJ Metal and Mineral Markets" (now Platts Metals Week). With tin, lead and zinc already restored to LME trading, the copper ring was initially timed last of the four, though a return to the prewar order of copper first was soon re-established.

Needless to say, copper consumers accustomed to 14 years of relatively fixed prices were not happy about the new order and it was only a year later in 1954 that a producer bravely offered its European customers copper at an advantageous fixed price for the year. The producer was Inco and it could afford the move as its by-product copper from its nickel mines in Canada was very low cost. Strangely enough its customers somehow forgot that they were supposed to pass the benefit of this price on to their customers in the price of their semis, so Inco gave up its magnanimity at the end of the year.

But the initiative rang bells with the man this piece is all about - Sir Ronald Prain, chairman of Rhodesian Selection Trust, the US-owned major producer (alongside Anglo American) in what was then Northern Rhodesia (today's Zambia). In May 1955 RST announced a fixed selling price for its copper of £280 a ton, when the LME was  nearer £300. At the scale it had RST was able to do what Inco couldn't - namely oblige its customers to pass on the benefit of their purchase price in the selling price of their semis. With the rest of the industry remaining LME-based, end users were confused and semifabricators who had not been RST customers previously were demoralised and furious.  

The initiative - or experiment - continued until 1957, but was killed by the strains of a dual-priced market. Nothing daunted, Prain attempted to avert this final defeat by creating a European equivalent of the E&MJ Metal and Mineral Markets price. In 1956 he persuaded Metal Bulletin to carry the numbers under the rubric "Metal Bulletin cif Europe wirebar average". Whilst stressing that it was calculating the average on behalf of the producers, Metal Bulletin dutifully twice a week (its publishing frequency) calculated averages from inputs from the ten leading sellers in Europe. Embarrassing to record that in the eight years life of the average not a single tonne of copper is known to have been priced on that basis.

So we come to the last and most striking part of the story. By this time Prain had secured the collaboration of both Ronnie Fraser, sales director at Anglo American, and Henri Lecointe at Société Generale des Minerais with its control of Katanga copper. In 1961, with no fanfare, they began operating on the LME to stabilise its price at a level of £234 a ton. By no coincidence this was, after taking account of the US import duty of 1 cent per lb, exactly the same as the US producer price of 30 cents per lb. (Remember that in those days the $/£ exchange rate was fixed for considerable periods).

There followed Prain's halcyon days when the LME hardly moved and consumers became so used to the stability they didn't bother hedging any more. If this was bad news for the LME it at least had its other rings to earn a crust. In New York the Comex only had its copper market and was very nearly wiped out. The only segment of the copper trade that still operated on fluctuating prices was scrap. The phase lasted long enough to become part of broader economics history and was christened "The Battle of the Prices". In parallel another interesting battle broke out between The Times and the Financial Times. The former steadfastly forecast that it would all end in tears, while the latter speculated that we might be seeing the birth of a new economic order.

Having achieved his price stability, Prain then implemented the other part of his stabilisation plan, which was to cut production. But in the absence of a twitching LME price, readings of the market began to suffer. In addition, Anglo American did not subscribe to the production restriction idea and eventually built up a huge stock of unsold metal. It eased this problem in December 1963 by quietly selling 30,000 tons to Japan, a quantity it is quite impossible to keep quiet for long. As Christmas approached brave souls placed significant buy orders on the LME; these were met, but the momentum had started. In the New Year RST announced it would end its LME stabilisation programme and would sell at its announced price on the American model.

This was Prain's last throw of the dice and he managed to keep it up a further two years but by the spring of 1966 the very customers who were supposed to be favoured by the attempts at stability - the semifabricators - called a halt to the experience and demanded a return to period pricing contracts based on the LME.

In the middle of all this in 1964 Northern Rhodesia morphed from a colony to the independent state of Zambia.

In a way the most enduring legacy of the whole episode has nothing to do with the producers - unless you count the fact that there has never since been a fresh attempt at introducing more stable prices than those on the LME. But on the LME some accelerated cerebration about its nature and function led to the overdue introduction of new trading grades of copper more in line with what was being produced; and more importantly the timely introduction of Continental warehouses in Rotterdam. For me, the occasion was the opportunity for a little light-hearted verse in the pages of Metal Bulletin:

"Ronnie Fraser, Ronnie Prain and Arthur Vere*

Are weeping all most sadly in their beer.

The producer price of copper 

Has come a frightful cropper 

And stability's a word they hate to hear"


* Arthur Vere was RST sales director  

           

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