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21 August 2019

Hicks



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


For anybody who was involved in the tungsten ore market in the 1960’s, it will come as no surprise that this article is titled with the single word 'Hicks'. For during those years Simon Hicks’ speculative, swashbuckling and at times apparently irresponsible trading was the main topic of conversation in the market and a source of frustration and irritation to the likes of the Philipp Brothers affiliate Derby and Co, itself a major player in the market on a more conventional pattern.

Hicks’s command of tungsten trading at Metal Exchange stalwart Metal Traders undoubtedly had its roots in his status as the son in law of the company’s MD Maurice Murphy. It was also something of an outlier to the company’s principal activity as a Metal Exchange  ring dealer in copper, tin, lead and zinc (the full range of LME-traded metals at that date). More importantly for the company’s directors’ understanding of what Hicks was doing, tungsten is strictly a physical market, unlike the futures markets of the LME.

Several other elements in the background at the time also conspired to create conditions in which Hicks could continue his maverick trading in tungsten far longer than might have been possible at a different era. To start with, the US and European markets were effectively separated – that in Europe almost entirely trading and consuming wolframite, while that in the USA was almost exclusively focussed on scheelite. In addition the US Government had, through WWII and the Korean War, built up a formidable stockpile of tungsten ore of which it was now a would-be seller, but constrained by political pressure from its domestic industry from itself moving the market.

Perhaps the extraneous factor that most played into Hicks’s hands was the selling policy of Communist China, always the world’s biggest tungsten ore producer. The 60’s was the period when China introduced its practice of selling the bulk of its exports of tungsten ore – and many other commodities -  through the twice-yearly Canton trade Fair. For Hicks this was a golden opportunity to bear the market ahead of each Fair, buy heavily and then bull the market up in the ensuing months when he was selling off his purchases. The amazing thing is that the Chinese let him go on doing this for the best part of a decade.

Another aspect of Hicks’s thinking that needs to be kept in mind is that to him it was of great importance to be able to influence the price as published in Metal Bulletin through the reports he gave of his trading. As the man in the hot seat for the formative part of this story you may be sure I expended considerable energy on trying to corroborate, or disprove, the reports Hicks was giving me. The ground was, of course, considerably cut from under my feet by the established practice that sales from an intermediary to an end-user were considered of prime importance for the formation of the MB quotation, whereas intermediaries’ purchases from mines had not traditionally been accorded the same weight. Needless to say, as the Canton Fair factor gained in importance, so an increasing part of my effort was devoted to finding the reality of Hicks’s purchase prices at the Fair. As the Chinese were typically inscrutable on the subject, it can be guessed that my success rate was limited. By the same token the big international metal traders in New York were no use as a source of information, as they were precluded by US legislation from trading directly with China.

Progressively the Hicks factor influenced all the other traders in the market to a greater and greater extent. A partial exception was Derby and Co, which concentrated on cultivating contact with buyers in the East European sector. Having originally bought most of their ore directly from Russia, which in turn had been steadily buying in China for political rather than market reasons, the East European consumers increasingly fell into the hands of Derby and Co, though as their trade was indexed on the Metal Bulletin quotation, they went up and down the same see-saw path as everybody else.

How damaging all this was to the straightforward process of price discovery is illustrated by a letter to the Editor of Metal Bulletin, which I duly published, from a reader in South East Asia. It was, he said, a waste of time giving statistical analysis of the supply-demand situation.  “All we want to know”, he said “is whether Mr. Hicks is buying or selling. Give us this information and we will know what to do.” 

Like all good things, the Hicks manipulation finally came to an end in March 1972 when Metal Traders declared themselves bankrupt.  It was the Chinese, who had given him so many openings, who were primarily responsible.  Desperate for hard currency, their offerings of tungsten at successive Canton Fairs grew bigger and bigger and bore down on both the level and volatility of prices. It was the latter that was most damaging to Hicks and his games. 

Apart from the Metal Traders directors and staff, who were all out of jobs, the biggest losers from the affair were revealed as the banks who had been financing Metal Traders. Unbelievably, they had been persuaded by Hicks that the Metal Bulletin quotation was not a reliable measure of the tungsten market, so they had accepted Metal Traders’ own written-down value of the stocks instead – a small matter of £22 a unit against the MB value of £19. Harsh reality emerged as bids for the half of Metal Traders’ stock of 5,000 tons of ore owned by the creditor banks came in. With the Metal Bulletin price having meantime fallen to £14 a unit, bids ranged from £10 to £12.50 a unit. This last successful bid was made by Climax Molybdenum which had taken the trouble to study carefully the analysis of the ore on offer and had carefully structured its bid on a scale of penalties for impurities.

One bank – Chartered Bank – emerged with credit from the affair. Rather than selling their share of the stock at £12.50 they held it while prices slowly recovered and eventually sold it at £23 a unit.

Remarkably, Simon Hicks went on to two further spells of activity in the tungsten ore trade, the one with Exsud, the Hochschild group company in London in  fact proving sufficiently successful to somewhat restore his personal fortunes. But a further solo trading period saw him a big loser, along with many others, on the silver market. Despite the adverse impact of the affair on Metal Bulletin’s reputation as a price discoverer, the trade continued using its quotation as its key reference, as it does to this day. However, it was not spared doctrinaire attempts by some in the tungsten processing industry to devise a reference price that would displace the MB quote.

Led by Hans Wengelin of Sandvik, a large user of tungsten and carbide in its tool steels, they formed the Tungsten Users’ Group Index, a mathematical analysis of members’ purchases presented as monthly and six monthly averages. It didn’t take the trade long to realise that these numbers were so close to the equivalent MB quotes that they could see little point in moving to them and the venture failed. Nothing daunted, the group returned to the fray a few years later with an International Tungsten Index, but this gained no more acceptance than the earlier one and died in 1992.

Tungsten today occupies a much more lowly place in the hierarchy of metal markets than it did in the sixties and seventies, not least because of the number of minor metals that have become commercially significant in the last 25 years. But the points of principle about the pre-eminence of the law of supply and demand that this story illustrates have not changed and are universally applicable.  







                      

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