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20 November 2018

Tin Crisis - Part Two



This is the second part of Martin Hayes' story of the Tin Crisis seen through the eyes of a journalist reporting the story. Part Three will appear in a few weeks.


On the first morning of the first day of the Tin Crisis, nobody had any inkling of defaults, multi-million-pound losses and legal wars – we simply knew that the Buffer Stock Manager had stopped his operations and that the LME had closed its tin market.

So, at Reuters, we got to work. First up was to do a news alert on the system. On paper tickers, which were commonplace, the news rang bells; on the electronic Monitor it set off an audible warning. That was how many people in the City first read the news.

Soon after 10:00, the KLTM (Kuala Lumpur Tin Market) also suspended dealing in the metal. Then Douglas Learmond walked in.

“You need to ring your mate de Koning, pronto - he’s chucked in the towel,” Chris said.

We then pushed out a speedy matter-of-fact reaction story, as well as a market report – other metals were falling badly now as overall sentiment had taken a knock.

Douglas had hit the phone pronto to get the BSM’s side of the story, sending that out quickly. But anybody expecting a ‘mea culpa’ from de Koning would be severely disappointed. Rather, it was more a case of ‘not my fault, guv.’ 

After that, from being the biggest player in the tin market, de Koning quickly faded into metal market history. Indeed, we heard that after a few other phone calls that morning, with no buffer stock to manage and – perforce - no wheeling and dealing to do, the BSM left his office and position in the afternoon.

For our part, we sent all the immediate stories out by mid-morning and stopped to consider what to do next.

This was not just an obscure commodity story – it had wider financial implications, not to say an international political angle. At Reuters, any major specialist story had to be re-written for wider newspaper and media clients by a Business Reporting Unit. 

This could be quite tiresome, having to explain contangos and backwardations, and avoid colourful clichés, such as ‘In the casino of the world’s metal market, de Koning gambled, placing a series of loss-making bets.’ 

So, a wider analysis, a look at commodity agreements in general, as the cocoa and coffee pacts also had issues, the usual market cover, and some attempt to pin down the cash price of tin. Douglas, Chris and Don divvied the specials up: as a junior, I was not going to do any of the major pieces, anyway - I was happy to cover the market from the open-outcry floor from midday.

Before the start of trading, however, I popped across Fenchurch Street to the Wine Lodge pub, where traders habitually gathered from 11.30 for a quick drink before business. I hooked up with Colin Warrener, an aluminium trader with Johnson Matthey, and Micky Morrison, who was with Boustead Davis.

“Looks like that advert of ours was not so daft after all,” Micky said.

Boustead Davis was renowned for a conservative approach to trading, and regularly had a front-page advert on the Metal Bulletin – ‘Sometimes the best advice is -  ‘Don’t Deal’.

But although Boustead Davis did not deal on behalf of the ITC, they certainly did business with many other firms who did, and who were now risky counterparties. In an uncleared market, which is what the LME was then, that spelt trouble in the future. The glum consensus was that this was going to be messy.

Trading on the floor that Thursday was different. The mood was subdued and distracted, and the reality of the situation became clear at 12:05, when copper’s five-minute first ring finished. The bell rang, the symbol indicated tin, and then – nothing. The tin market ‘big beasts’ were silent. There was no explosive burst some four minutes in when the ITC’s proxy buyers would dramatically bid and book whatever came their way.

The well-oiled machine that was Reuters reporting pumped out what was expected that day, and then we tried to look ahead. What would the ITC do? How about the banks and brokers? And all the governments – most of the major producers, the entire European Community (EC) and other consuming countries?

Just before afternoon kerb trading ended at 17:00, I asked a senior floor trader what he thought would happen.

“They need to come up with something and come up with it fast,” he said, pointing at the LME boardroom overlooking the floor.

On the very next day – Friday - the LME convened a rare joint Committee and Board meeting. They decided tin would remain suspended for a week while the ITC deliberated. They also asked members who had contracts with the ITC to put up an additional margin of £1,000 per tonne – some £60 million for the 14 ring dealers.

At the same time trader AMC, part of Germany’s Preussag, obtained an injunction in the UK High Court preventing the ITC selling the tin it held.

So, in just 24 hours the tin meltdown was already costing the market money, both in falling prices and increased margins, while the first skirmish in the lengthy, expensive legal battles to come had started. 

The hope – that sunny autumn weekend – was that the brokers, the banks, the countries and the politicians would get to work and resolve the crisis. That proved to be wishful thinking.

For a week the market remained in limbo. Brokers did indeed meet with bankers, who spoke to government officials, who then talked to their foreign counterparts. But the key player, the ITC, moving at glacial pace, did nothing.

On Friday November 1, the LME met again and said it would not re-start tin trading for at least another week. That was misplaced optimism as well.

“When you’ve got 22 countries, 28 LME member firms and dozens of banks all running around like headless chickens, then you need somebody to take a lead,” David Williamson of major floor trader Shearson Lehman Brothers said.

The UK Government, Margaret Thatcher’s Conservative Party, tried just that, and said it would honour its obligations to tin traders, convening a meeting of the ITC the following week. This was because the ITC, like many other such commodity organisations, was headquartered in London.

But it takes two to tango, and most other ITC members displayed a distinct lack of enthusiasm in coughing up money to honour obligations on what were now loss-making contracts. Indonesia was the exception among tin producers in pledging a contribution of sorts; the rest simply looked away.

And it was not just the producers – some consuming countries felt that tin had been over-priced for years. West Germany, for one, said rather than a bailout, the tin price should be allowed to fall. Not much consensus there, and when the ITC did meet it merely suspended meetings for two weeks.

The LME bowed to the inevitable and kept the tin market closed. By now, as well, the exchange had other problems - volumes and prices were down. In some cases, turnovers were 50 percent lower than usual, as many brokers were wary of dealing with counterparties in an uncleared market.

Rubbing salt into the wounds, Canada’s Inco, now part of Vale, but back then the biggest nickel producer outside the Soviet Union, requested that the LME suspend trading in nickel, as prices had fallen to three-year lows.

Not to be outdone Canada’s Falconbridge called for a halt in zinc trading, while Alcoa said it would no longer use LME trades in setting its aluminium prices. Cominco – a lead/zinc miner – made similar noises. 

For the LME, the spill-over from tin was starting to threaten its whole existence, not only as a trading venue, but also as the provider of the key global benchmarks – its daily Official Prices. 

All of this was good sensationalist news material, and it was not just the ‘trade press’ – alongside Reuters, Metal Bulletin and Platts, the FT, the Wall Street Journal, the Times, the New York Times, among others, all pored over the entrails of the developing debacle.

Meanwhile, although tin on the LME was in stasis, with potential re-openings continually being postponed, the day-to-trade in the physical metal had to continue. Accordingly, a grey market emerged in early-November, which morphed into an alternative reference price, based on levels discovered by the specialist reporting agencies.

There were three key price providers – Reuters and Metal Bulletin in the UK, and Metals Week in the US, who all spoke to the same circle of merchants, traders and industry sources. Metals Week published once a week, Metal Bulletin twice-weekly – both in their magazines. 

At Reuters, the spot tin price was arrived at daily, and issued around 4pm every day on the TNLB page on the Monitor screen – by dint of being a daily price and issued electronically, this became widely referenced by the global tin trade.

Chris Piper handled this for us at Reuters, and he was superbly adept at discovering a fair and free price level – he was immune to charm or chastisement from all parties. I stood in occasionally for Chris and had some challenging moments, as through late-1985/early-1986 the price crumbled below £7,000 and headed towards the lower £6,000s.

This price collapse was the backdrop to the increasingly complicated wider attempts to resolve the situation.  So, as 1985 drew to a close, creditor banks came up with some concrete ideas to resolve the impasse at the ITC.  With Standard Chartered Bank setting the pace, the banks offered to advance £550 million for three years at market rates to help the ITC meet its commitments to brokers. 

Again, there was little sense of urgency at the ITC, and this proposal soon foundered. By now, too, LME members were starting to suffer, and MMC Metals, a subsidiary of the state-owned Malaysia Mining Corporation, defaulted on £13.9 million of obligations to another broker and went into liquidation – the first casualty.

In December, the ITC went into an open session, while the banks and LME brokers this time made another valiant attempt to come up with a rescue. Names are worth mentioning here, and Peter Graham of Standard Chartered and Ralph Kestenbaum, MD of ring trader Gerald Metals, worked tirelessly on what became known as ‘Newco’.

The plan was this: Newco would assume the ITC’s assets and liabilities, winding them up by disposing its tin stocks over three years. It would be backed by an equity package of £270 million - £200 million from the governments, £50 million from brokers and £20 million from banks and new loans from Standard Chartered Bank guaranteed in part by the UK government.

This was presented to the ITC in late-December – a Christmas present to clear up the mess. In January, the ITC finally agreed to negotiate with its creditors, and although its first offer of £60 million was pitifully low, Graham and Kestenbaum put in the hard yards for the next two months to find common ground.

As a story, tin now had the hallmarks of a long-running saga – it wasn’t top news every day. For reporters and the LME traders the day-to-day market carried on. However, prices and turnovers continued to decline – grey market tin being no exception.

The LME went on a PR offensive to some extent to keep the wider public aware of what was happening. Michael Brown, resplendent in his three- piece suit and with a collection of tin objects, appeared on BBC Breakfast TV, raising the growing possibility that 22 sovereign countries would welch on their debts. 

If so, as he told interviewer Selina Scott, it was not just a bunch of City traders who would suffer – the UK had tin mines in the West Country and smelting facilities in the North East – thousands of industry jobs were under threat as well.

So, it all depended on Newco, and by late-February most ITC countries were reluctantly on board. Not all, however, and on March 6, 1986, Indonesia and Thailand vetoed the plan – Newco was stillborn. Douglas, in his office this time, spoke with Ralph Kestenbaum who confirmed that this was the end of the road.

This was the last moment that the tin crisis could have been resolved. Now it was every man (bank/broker) for himself.


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