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17 October 2018

Tinxit Brexit




This article was written by John Wolff. All views and opinions are strictly his own.


I find the interminable Brexit negotiations keep reminding me of the Tin Crisis in 1985, when the International Tin Council defaulted sending shock waves not only in the world of metal trading but throughout the City. Anyone involved in the five years of frustrating negotiations between the ITC and its creditors may be irritated by the present Brexit negotiations, but would not be surprised.

My fear all along has been, whatever side you are on, that the final Brexit deal will satisfy nobody. That concern has been based on my experience in being involved in the Tin Crisis negotiations. Let me remind your readers, Lord Copper.

The  default of the ITC in October 1985 resulted in five years of negotiations to find a settlement. The ITC was made up of twenty-two Member States, including most West European countries, Japan, Canada, Australia, and tin producing countries such as Malaysia and Indonesia. Just like the EEC, any decisions had to be unanimous.The creditors consisted of fifteen brokers, thirteen banks, three tin producers, and five physical traders.

This meant there were fifty-eight parties involved in the negotiations.

Throw in to the mix a complex weave of forward transactions, thousands of tonnes of physical tin, additional very interested parties who might be hit by the possible domino effect of the default, overseas parent companies of ring dealers, and lastly, but really firstly, a massive amount of money involved - half a billion pounds. Much bigger in 1985 than it sounds today.

This was not the first time the ITC had run out of funds, but on previous occasions their dealings on the LME had only consisted of purchasing LME warrants. So when their funding was exhausted they had to stop buying cash tin. This caused a bit of drama in the market because the tin price fell, but there was no default. Eventually, maybe after a period of years, the ITC would regroup, refund, and start again. Their objective was to hold the price of tin between levels which were acceptable to both producers and consumers, which is why the Member Sates included both consumer  and producer nations.

The great difference in the build up to the October 1985 crisis compared to previous situations was that the Buffer Stock Manager, who placed the orders for the ITC, had persuaded his bosses, the Member States, to authorise him to trade not only in the spot market but in the forward market as well. This would save the ITC having to finance stock.

From the brokers’ and bankers’ perspective, here was a cast iron client. What could be safer than a client which was a consortium of international governments, including many first world nations? Furthermore, it was assumed that they regularly audited their activities and were in control of their Buffer Stock Manager. Therefore the brokers felt no need to call the ITC for margin payments, and the banks were equally happy to lend the ITC money to finance stocks with minimal conditions.

In the end, a prolonged bear market meant the Buffer Stock Manager had to buy more and more tin, and with his ability to buy in the forward market, and the Member Sates unaware of the extent of his trading, his total purchases became enormous. When the final number was revealed, to everyone’s horror it equated to eight months’ world production. The ITC was forced to cease supporting the tin market.

Up until that point, many people had predicted that due to the bear market the ITC  could not go on buying forever. They would run out of funds and there would be a nasty fall in the tin price.

What was not expected by anyone however, including the banks, was that the ITC would default and not meet its obligations to the brokers and banks.

This left the City in turmoil, especially when the size of the default became known. The LME suspended trading in tin. The long nights of negotiations, which would turn into years, began.

When it became clear after six months that there would be no quick solution, the LME was left with a major problem. It could not leave the tin contract suspended indefinitely, yet if it reopened the market the price would go into free fall setting off a string of potential bankruptcies. The numbers were so large it might bring down the whole Exchange. A decision was made to close the tin contract down - Tinxit. That left the problem of how to deal with all the open contracts between longs and shorts that had been in suspension for six months. The only way was for the LME to select a price on which all these contracts could be settled, and differences calculated, which came to be called the Ringout.

It was a very difficult exercise because any price we chose was theoretical. There was no precise formula to ascertain the right price. There could not be an unarguably right price. We took account of what was happening in the grey physical market, but only small tonnages were being traded. If we set the price too high, we would have been accused of favouring the longs. If we set it too low it might trigger defaults and set off the domino effect the City was so anxious to avoid. In the end a price of £6250 was agreed by the LME Board and Committee, which was also used to  quantify the ITC’s debts.

(It was later unsuccessfully challenged in the High Court in the proceedings between Shearson and Drexel in which I became embroiled. Shearson, in discovery, found out which Committee members had voted for the Ringout. As we were elected to the Committee by the members in our personal rather than corporate capacity, Shearson sued us personally as third defendants. Potentially, I was liable for $100 million dollars if the case was lost and the other defendants did not pay up - rather a pointless exercise for Shearson in my case!)

Negotiations with the ITC continued for another four years. Endless meetings. Hopes raised. Hopes dashed. Infighting between the parties. One of the difficulties was how to pursue the  the ITC legally. In which country could you sue them? They were a partnership of nations, but where did they exist?

Initially the UK Government agreed to pay their 4% share in full, which equated to  £25million. We hoped that would lead others to follow. Some governments indicated they wanted to pay but were stymied by having no mechanism within their constitutions to raise the money required. Others wanted to get away with as little as possible, and some not pay at all. Malaysia and Indonesia were particularly difficult and because of the unanimous vote needed held a lot of power. The UK withdrew its offer, panicking that if the ITC were deemed to be a partnership the UK could be held jointly and severally liable for all of the debt if the other countries did not pay up.

Finally as you can read from the extract from the final settlement, the ITC agreed to pay about 35 pence in the pound which equated to £180 million out of the £517 total debt. (Note - for those accustomed to the current low interest era - that £200 million of the debt was made up of interest; and how many names on the list of creditors still exist?).

It  was a disgraceful outcome. International governments had lost control of their affairs and simply chose to renege on their moral obligations to the private sector. What we learned the hard way though, was that governments are not moral. They are pragmatic. The UK and other governments paid up enough to prevent the collapse of the LME and head off a domino effect, but by not paying up in full, they were not going to lose votes. The LME was better known in the mining capitals of the world than the shires of England.

Ironically at this time the UK Government was starting to impose Regulation on the City and the  LME because the LME could not be trusted to regulate itself. That had to be a matter for honest governments.!

Now, we know the Brexit negotiations involve far more parties, and complex issues than the Tin Crisis. So, my Lord Copper, I wish your readers the Brexit deal they want, but I don’t think they are going to get it.



Name


Net Claim £M

Proposed Recovery £

AMT (Tin Recoveries) Ltd


24.66

8,575,162

Amalgamet Inc


3.64

1,265,162

Berisford Malaysia


0.98

340,781

Berisford Metals Corp


10.61

3,689,476

J H Rayner


24.94

8,672,528

Boustead Davis (Metal Brokers) Ltd


0.32

111,275

Gerald Metals Ltd


14.27

4,962,188

Gill and Duffus


41.02

14,264,117

Henry Bath & Sons Ltd


6.74

2,343,738

Holco Trading Co Ltd


7.66

2,663,655

Metallgesellschaft AG


1.62

563,332

Metallgesellschaft Ltd


16.69

5,803,708

Metdist Ltd


0.26

90,411

Mocatta Commercial Ltd


4.27

1,484,831

Rudolf Wolff &Co Ltd


22.26

7,740,596






Sub-total

179.94

62,571,556





Arbuthnot Latham


3.66

1,272,713

ANZ


6.87

2,388,944

Banque Indosuez


1.83

636,356

Hambros Bank


6.06

2,107,278

ABN


19.64

6,829,529

Kleinwort Benson


7.02

2,441,104

TSB


7.51

2,611,495

Arab Banking Corp


8.49

2,952,276

Bank of Nova Scotia


1.36

472,921

Bank of Tokyo


31.92

11,099,723

Bank of Bangkok


4.87

1,693,473

Bank Bumiputra


52.32

18,193,530

Malayan Banking Corporation


25.40

8,832,486






Sub-total

176.95

61,531,828





Datuk Keramat Smelting SB


3.23

1.123,186

Malaysian Smelting Corp SB


3.25

1,130,141

MMC (KL)


2.32

806,747






Sub-total

8.8

3,060,074





Manilal & Sons (M) SB


1.50

521,604

Manilal Commodities (UK) Ltd


23.24

8,081,377

Shearson Lehman &Co Ltd


77.81

27,057,313

Maclaine Watson &Co Ltd


32.87

11,430,072

MMC Metals (in liquidation)


16.66

5,793,276





TOTAL


517.77

180,047,100


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