This article was written by Steven Spencer. All views and opinions expressed are strictly his own.
At a time when trade wars threaten and trading volumes are constantly under threat, absolutely the last thing any exchange needs is to put further barriers in the way of trading, especially so in the wake of a raft of sanctions on Russian and Iranian products. Yet now we have exchanges all over the financial system rushing to comply with the OECD’s “Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas”. Indeed, the LME website is replete with confidence inspiring commitments to adoption of the OECD guidance.
However, throughout the history of commodity trading the “north-south divide” has recognised that the bulk of commodity supply comes not from the developed world but from second and third world countries south of the tropic of Cancer – in Africa, South America and South-East Asia. Since the end of colonial administration many of these countries have histories of civil unrest, drought and deprivation, conflict and famine.
Not only did the OECD issue its guidance on “high risk” supply chains from conflict areas in 2013, but since the Dodd Frank Act of 2010 addressing conflict minerals, the United States publishes “a list of goods and countries which it has reason to believe are produced by child labor or forced labor in violation of international standards as required under the Trafficking Victims Protection Reauthorisation Act (TVPRA)” (US Department of Labor.)
Their product list includes fruit, sugar cane, cocoa, coffee, corn, nuts, grains, cotton, copper, cobalt, gold, palm oil and tin among others, all traded on terminal markets around the world. Countries that produce them include Brazil, China, Burma, Democratic Republic of the Congo, Egypt, Ghana, India, Indonesia, Malaysia, Mexico, Peru and Zambia among more than a hundred others. It is a sobering thought that the current 2018 members of the UN Council on Human Rights include Iraq, Cuba, China, Qatar, Angola, Burma, Venezuela, Democratic Republic of the Congo, Afghanistan, Saudi Arabia and the UAE, all topically involved in well publicised human rights abuses.
Sadly, even if produce of these countries is to be eschewed by exchanges as deliverable commodities, they will quite simply be traded on the physical market as they always have been. There is little or nothing that the LME or other exchanges can do to prevent companies trading these products from hedging them on the markets. They can only prevent delivery of specific brands against sales, thus creating artificial short term shortages and backwardations. This will do little or nothing to prevent the metal from being mined, refined and delivered physically to less scrupulous consuming nations around the world; for example, China is the biggest importer of Iranian crude oil, despite sanctions.
It would be quite another thing if the companies themselves who source products at the edge of legality were prevented from trading, but any such sanctions would be ineffective as many are outside the jurisdiction of the LME. Not only that, but self-interest would dictate prudence as such sanctions might affect the volumes on the exchange and impact revenues. In among the dozens of well-publicised scandals involving pollution, bribery, and dumping of toxic waste are most of the leading commodity traders, miners and refiners. Too detrimental to margins to make sense interrupting their trading activities so instead the London Metal Exchange is concerned about cobalt of which it has about 700mt in stock and which traded just over 14,000 tons last year, compared to an annual production of over 100,000 tons.
In comparison, the flagship copper contract traded about 850 million tons compared to an annual production of about 23 million tons. Because the Dodd Frank Act already targeted tin and cobalt and substantial work had already been completed by the time the OECD published its own paper, cobalt (DRC) and tin - another low volume metal with Myanmar (Burma to you and me), of course, and Indonesia the main offenders - became the low hanging fruit that could demonstrate intent to comply with OECD guidance without significantly impacting trading volume. Again, a ban on deliverable stock from these counties would not make any significant difference to the trading volumes on the LME.
Sadly, international banks continue to finance the sourcing, mining and refining of products from high-risk origins and there is little that can be done about that, but the other side of the coin is that these commodities form sometimes the only major source of revenue and thus labour income for poorer and relatively underdeveloped countries. We may be sacrificing them to satisfy our ever-compliant souls.