This article was written by Trevor Tarring. All views and opinions expressed are strictly his own.
2020 will see the thirty-fifth anniversary of the collapse of the latest and last International Tin Agreement, which came after its almost thirty years of existence. That is long enough ago to mean that at least half the people active in tin trading today have no first hand experience of that Agreement in operation. This seems to me a good enough excuse to recap an event that at the time was – and today arguably still is – far and away the biggest shock in international commodity trading since World War II.
The first of a series of five year International Tin Agreements came into operation in July 1956 after years of fraught negotiation under the aegis of the United Nations. With the market’s chaotic past price record, the arguments in favour of a scheme to keep prices more stable were very persuasive, though balanced by the record, going back to the early 1920’s, of earlier attempts to stabilise the market, all of which had ultimately failed. The persuasive argument in favour of the postwar Agreements was that they were not intra-industry agreements, like all the predecessors, but UN-mandated and backed international agreements.
Like all such agreements, a key factor at the outset was to start stabilising when prices were agreed to be about midway between the yin and yang of free market fluctuations. Since those fluctuations are themselves the result of the constitutional optimism on price of producers and pessimism of consumers, catching the mid-point was never going to be easy. But on July 1 1956 that moment arrived and the first Tin Agreement and its International Tin Council were born. A structure of price levels was created designed to prevent the extreme fluctuations that had characterised the free market, but leaving a range within which the law of supply and demand could still operate freely. Outside that range, the Tin Council, through its Buffer Stock Manager, was enjoined to buy metal if prices were too low and put it into stock, or to sell from its stocks if prices were too high. Compared with later Agreements, the process of building an initial stock of 25,000 tons from contributions from producing countries went fairly smoothly. On the other side of the table, consuming countries put up cash. This was further refined by price tranches approaching the “must buy” and “must sell” limits, in which the Buffer Stock Manager had discretion to buy or sell. A final layer of defence took the form of a mechanism for introducing export controls on producers in the event of a sustained surplus.
“The path of true love never does run smooth” and the First Agreement had its moments of crisis, despite the fact that the USA, which had accumulated a huge strategic stockpile of tin during WWII and the Korean War, gave the Agreement valuable support by its responsible management of the programme of disposals that had been mandated by the US Government. The other weapon in the Agreement’s armoury was its ability to adjust its own “must buy” and “must sell” limits, which it duly did in the currency of the First Agreement, as well as imposing fierce production controls on its producing members. Nevertheless that Agreement was thought to have done enough for a second to be signed into existence in July 1961. The market made that Agreement an easy one for producers as prices never dipped below the “must buy” level, despite the fact that the ranges were adjusted upwards on three occasions.
During the Third Agreement of 1965, the USA chipped in with a total cessation of sales from its stockpile, which removed the need for Buffer Stock Manager purchases, but needed bolstering by the producer members also imposing production restriction on themselves. The UK inconveniently devalued sterling, necessitating an adjustment in the ITC limits. Almost 20 years later, by which time the Agreement values were expressed in Malaysian ringgit, the Sixth Agreement forgot to make a corresponding adjustment when the ringgit appreciated.
With the Fourth Agreement came the first signs of the delusions of grandeur that were ultimately to become the programme’s undoing. Most notably the ITC obtained additional facilities from the banks of £36m. which it could use in support operations. In short and practical terms the clearest sign of impending trouble was a growth in ITC stocks in the course of this Agreement to 20,000 tons, though this had been reduced by the end. Concurrently, three rises in the price support levels in the life of the Agreement pushed the boat out a bit.
An odd feature of the Fourth Agreement was what has gone down in history as the “Adnan/Bueno affair”. Indonesian Tom Adnan was the Agreement’s first Buffer Stock Manager, a position of very considerable power, and Jaime Bueno, a Bolivian, was his deputy. Both had good tin trade pedigree. But in 1975 the Executive Chairman of the Council, a rather stodgy Australian diplomat, Harold Allen, shocked the market by revealing that Adnan and Bueno had been sacked, leading to a crisis recruitment of temporary replacement officers. What they had done to warrant this was never explained and they, of course, protested their innocence. If Allen gave the Council members an explanation, nobody has ever said what it was
In terms of global politics, the feature of the Fifth Agreement of 1975 was the recruitment of the USA as a signatory, a surprising move that was not repeated for the Sixth. It cemented the “Good buddy” status of the USA already evident from its earlier cessation of stockpile sales. Most of the East European Soviet satellite countries also joined this Agreement as well as a couple of other Communist outliers. All this underpinned the confidence of the new Buffer Stock Manager, Pieter de Koning to institute five rises in the Agreement’s price levels. This time round members were called for increased cash contributions to the Buffer stock each time the limits were raised, instead of only at the transition from one Agreement to another, as previously.
During the life of the Agreements so far, something that would nowadays be called “mission creep” had been occurring, in that the Buffer Stock Manager’s office had been moving into ever more sophisticated transactions in an effort to keep all the balls of his operations in the air. For Pieter de Koning the last two years of the Fifth Agreement (its renewal was delayed by a year) must have been hellish. In counterweight to the increasing sophistication of his own operations, speculative forces on the LME had finally found a way to bet against him in July 1981.
Initially, only the identity of the Ring dealer buying heavily was known; it was Drexel Burnham Lambert, a US-owned brokerage. But over time the real operator was traced through the involvement of Marc Rich to the Malaysian Government with its self-evident interest in the health of tin prices. The support certainly worked, not least because the producers backed it with draconian self-imposed production cuts. As 1981 wound out prices kept climbing and in November the support buying suddenly switched from three months to cash, producing a £500 backwardation. As cash prices approached £9000 (remember these are 1981 pounds), the LME Committee decided it had to decide whether a corner was in operation; a ”corner” or situation where one trader controls virtually all the metal available for trading is sufficiently abnormal that the Exchange’s fathers had written rules to deal with it. Underpinning the abnormality of tin prices was the depressed level of prices in all the other LME-traded metals accompanied by a contango. The LME imposed a tin backwardation limit of £120 a day – suitably harsh medicine.
By March prices were in free fall and the back had disappeared. This debacle was hardly the perfect climate in which to negotiate the delayed commencement of the Sixth Agreement and it was not until August 1981 that an Agreement text was in place for signature by member countries by April 30 1982. Not surprisingly, few countries were queueing up to be early signatories and by the first deadline barely half the expected number had. Eventually an extended deadline and acceptance of signatures from only 65% of planned participants got the job done. At the waterfront, the new Agreement inherited a hefty 50,000 ton buffer stock from its predecessor, while member cash contributions were widely either late or missing. The effects of production control were being negated by non-member producers China and Brazil (and, it may be added, the UK – a consumer member - which in its small way was now producing more tin than since the nineteenth century).
The resemblance between the Buffer Stock manager and a whirling dervish was becoming obvious. Add the fact, mentioned earlier, that the Malaysian dollar appreciated in value against other currencies like the dollar and the pound and the inevitability of the Agreement’s final collapse becomes clear. This actually happened on Oct. 24 1985 in the shape of a phone call from Pieter de Konig to the then Chairman of the LME Committee Ted Jordan to say that he was unable to meet his trading obligations that day.
That simple message was the precursor to almost five years of wrangling, litigation and governmental obfuscation in which a loss initially put at £463 million was eventually settled with a payment of £180 million. The loss did not fall equally on all the parties involved, including those that, during the negotiations, had declared bankruptcy. And today’s tin trading on the LME shows no sign of this piece of history.