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06 December 2017

Prix Fixe

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

Looking at the way so many metal and ore prices have gone this year, one is reminded that, from time immemorial, people have been saying there must be a better way of discovering prices than through the rough and tumble of bid and offer.

And during the 20th century, there never was a lack of people willing to try to find that better way. Indeed, at mid-century in the fifties there were, in fact, a lot of prices which, if not permanently fixed, were at least changed only infrequently. True, the climate of thinking at the time (at least in the UK, the focus of so much world metal trading) was influenced by the relatively recent years of World War II when strategic necessity forced the Government to introduce state control of metal prices - an approach which broke the mould of twice-daily changing prices in metals traded on the LME. And in the postwar years the Labour government of Clement Attlee was doctrinairely inclined to keep that control going. Thus the LME, which at that time traded only four metals, was able to resume open outcry trading in tin only in 1949 (four years after the end of the war) and copper not until 1953. On the UK market, controls on ferro alloy prices were not relaxed until even later.

In the USA too, despite a Comex market in copper, it was an article of religion that metal prices were fixed by the producers and changed only infrequently. Further down the scale from the major metals, minor metals were even more likely to have announcements of changes in their producer price quite rarely. Materials like tungsten ore, which had always been a volatile market, were the exception and, of course, much cherished by the merchant fraternity for their scope for speculative gains; the contingent losses in fact moved the market close to, but not at, a zero sum game.

Yet it was during the late fifties and sixties that two really serious, though unrelated, attempts were made to force fixed prices on to particular markets. In marvelling from the standpoint of today at the success each of these moves had for around a decade, it must be remembered that they were underpinned by yet another fixed price – the value of the £ in $ terms. For metal trading that was an even more important parameter then than it is today. A look at these two moves – and the metals and the men behind each of them – reveals mostly their differences; but the elements of similarity are instructive.

Chronologically, the first move in this story came in 1953 when the dominant supplier of bismuth to the European market, a company called Mining and Chemical Products (MCP) announced that it was pegging the price of bismuth at 16/- (£0.80) per lb. Bismuth had not been a particularly volatile market previously, but the initiative naturally sparked interest in a wider field than the bismuth market itself – an interest that turned to amazement as the price was indeed held at that level for the next eleven years, despite an annual inflation rate of some 2-2.5% a year.

Time to ask who could have thought of this initiative. It was the managing director of  MCP called John Lennon (nothing to do with the celebrated Beatle). But the man who pursued the idea with Messianic zeal was his successor a year later, Gerard Hodge. A cerebral and eloquent advocate of his policy, Hodge had come to MCP from a background of service with the internal revenue service of British-controlled India. His switch to metals commerce reflected a desire to make some real money like his brother Julian, already a notably successful financier.  

Bismuth’s place in a rather obscure corner of the metals world and its diversity of sources and applications meant that nobody had any reason to try to upset Hodge’s applecart. And MCP being backed by the  former Bolivian tin barons the Aramayos meant that financial resources were not a pressing problem. In America, Asarco was the dominant force in bismuth. Custom smelter as it was, the company went along with the stabilisation in its dollar price on the home market. 

Even without any great changes in the supply-demand position, political upheavals or technological innovations, some external pressures began to impact bismuth after a couple of years, not least some speculative moves by traders sad to see themselves excluded from a market where they had previously occasionally made profitable forays. Hodge fended them off with a change to a price structure of 16/- for ton lots, but 16/6d for small lots of 2 hundredweight. (A hundredweight or cwt is one twentieth of a long ton).

But it was technological advance that offered the most challenge in the development of the so-called Sohio process for producing acrylonitrile which uses bismuth as a catalyst. In 1964 Hodge had to concede an increase to 17/- per lb. but was still trying to stem the flood by putting his finger in the hole in the dyke. How matters would have evolved further must remain a matter for conjecture, because reality was that Hodge lost his life in a notorious plane crash at Tokyo in March 1966. Almost immediately bismuth returned to the desultorily unstable market it had always been. 

Our other stabiliser was a quite different character – namely Ronald Prain (later Sir Ronald Prain), boss of Rhodesian Selection Trust, one of the forerunners of today’s Zambian copper industry. He worked his way up through the ranks, starting as a clerk with Marshall Bros, the precursor to LME ring dealer Anglo Metal (subsequently Ametalco). This led to his involvement with the early years of Rhodesian Selection Trust and eventually in 1943 to his appointment as its managing director. Fast forward to 1955 and Prain was accepted worldwide as one of the most senior and influential men in the copper industry. He also decided he was the man to do something about the adverse effect on copper usage of its daily-fluctuating LME price. So he postulated to his fellow producers the idea that they should cut back production at times of low demand, but keep that capacity available until recovering demand meant they could feed it into the market and damp down an otherwise rising price. This is some way removed from the average miner’s mindset.

With both the other Rhodesian producer Anglo American and the UMHK in Belgium, which controlled the Congo output, falling in with the  plan, the momentous announcement was made on May 9 1955 that RST would sell its copper at the fixed price of £280 per ton at a time when the LME was trading around £300. Their semi-fabricator customers were also told that the benefit of this fixed price had to be passed through to their customers in the price of the semis. Of course this ideology did not apply to the market as a whole and end users had to get used to a split structure for some copper product prices.

For all the muscle of the African producers and a lack of countervailing messages from the producer price in the USA, some sedate movement in the RST price was made from time to time as the burden of  holding metal off the market became too uncomfortable.  The deathly impact of this on the LME copper contract was just avoided by the European scrap and secondary trades continuing to both follow LME prices and, as necessary, hedge their risks there.          

For the next six years the LME continued forming its price as a counterpoint to the stabilised RST price. So in 1961 Prain began also to use his muscle to drive the price on the Exchange into the straitjacket of the prevailing RST price, which at that time was £234, every session. This figure was not empirical, but the equivalent of the prevailing US domestic price of 30 cents per lb. after allowing for the US 1 cent import duty. This really was potentially fatal for the Exchange; without price fluctuations hedging business died away altogether. The Exchange’s reaction was not immediate, but when it came it subsequently proved invaluable. It took the form of an overdue update in trading grades, making wirebars, cathodes and fire refined deliverable. Equally important for its future, the Exchange also introduced its first warehouse locations outside the UK in Rotterdam. Contingently the RST price was moved to £236 a ton for three months cathodes.

So we come to December 1963 when the strains on the producers of maintaining their control began to be apparent to the market. A price above £236 was bid on the LME and though it  was met, consumers began to panic and demand more metal. The next month the producers abandoned stabilising the LME, instead announcing their own selling price on the US model. Reflecting their similarity to the proverbial little Dutch boy with his finger in the dyke, by October 1964 (at which date Northern Rhodesia became independent as Zambia) the LME had risen to £530.

All this was too much for the fabricators; through their organisation, the International Wrought Non Ferrous Metals Council, they formally asked RST to cease its quotation; with, no doubt, a sigh of relief it complied.

In terms of scale and international impact, the RST price is a much bigger story than that of MCP’s bismuth price. But to draw out the parallels of type between the two schemes I will cite a rather daft story that was circulating in motoring circles in the UK in the fifties. 

Apparently there was an older lady who started riding in motor cars as a passenger in the thirties. Between the mediocre performance of most family saloons at the time and the limitations of most main roads, she became accustomed to cruising at no more than 50mph. After the war her husband bought a new car and began travelling at speeds of 60mph and even 70 mph when possible. This she did not like so took matters into her own hands. Taking a hammer, she drove a nail into the face of the speedometer at the 50mph mark so that the needle could not pass it!

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