IT IS now one of the favoured metals but those with longer memories will recall the dark days of 1985. The Outcrop by Robin Bromby.
Kangaroo Metals gets attention with its alluvial tin operation in Tasmania, Outback Metals is testing interest in the metal by basing an initial public offering on tin, and now Indonesia’s Timah, the world’s largest integrated tin miner, is reported this week to be looking to pick up tin mines in Australia to expand its output.
Suddenly, we’re all ears for tin. But, for 20-plus years, it was all so different.
How about this headline in The Wall Street Journal in late 1985: “Tin trading is halted over increased fears of a price collapse”.
On October 31 of that year, there was talk of terminating all futures trading in copper and aluminium because so many metals traders had been whacked by losses in tin that they didn’t have sufficient liquidity in some cases to ensure a robust market in other metals.
A few days later, Inco asked the London Metal Exchange to suspend trading in nickel. The company said the previous week’s suspension of tin trading on the London Metal Exchange was unduly influencing the LME price for nickel.
Falconbridge supported the idea and said zinc trading should also be halted temporarily.
Any company with a tin project here, until a year or two ago, was whistling in the wind when it came to getting interest in the metal. Now tin is starting to make a comeback in terms of investor consciousness.
But this might be the time to just take a look back at the events of 1985 and why tin’s collapse has been so hard to put behind us.
And that is mainly because there had been an attempt to maintain an official floor price at all costs.
The International Tin Council had borrowed £900 million to support the price of tin after its own cash reserves had run out. That failed, and the international tin agreement ceased to exist on October 24, 1985.
The tin market was frozen in fear and uncertainty. The ITC could no longer honour its tin contracts.
All the money that had been spent on supporting tin and buying the metal had resulted in the council ending up with a stockpile of 100,000 tonnes, equivalent to about six months of world consumption.
The allegations of price manipulation rippled through the financial press, not surprisingly given that the ITC’s action had seen the metal go as high as $US13,320 per tonne (remember, this was 23 years ago).
There was a further complication in that some trading houses had forward sold more tin than they actually owned, and so there was a mad scramble for the metal to meet contracts.
There were even newspaper reports saying that the British Government might have to bail out the LME, so great were the losses on tin among many traders on the exchange.
The losses were stark when expressed in sterling prices and in 1985 terms.
The WSJ reported that the London trading houses stood to lose a combined £70 million for every £1000/t fall in the price of the metal.
After tin’s suspension in London, prices in New York fell by 20% in the following days, or about £2000/t, meaning the London houses were staring at a combined loss of £140 million.
Banks had taken 40,000t as collateral for loans, but the ITC ended up defaulting on that £900 million after Indonesia and Thailand scuttled efforts to recapitalise the body.
There had been a tin agreement, in one form or another, since 1921. The reason for this is that, unlike other metals, tin’s price had been extremely volatile because of recurring and varying gaps between supply and demand.
An article written a year after the initial collapse explains the tin market, with some relevance to today.
In the American Journal of International Law, Eric J. McFadden noted that the chronic imbalance in supply “causes small changes in production or consumption to result in large changes in price. The reason for its inelasticity of demand is that tin generally constitutes a minor component of finished products. Thus, even a substantial change in the price of tin has little effect on the price of a product in which it is used”.
For example, the cost of tin accounted for less than 2% of the price for tin plate and while tin, at the time, made up about 80% of the content of solder, the solder itself was used in very small quantities in each end product.
Now, in light of those remarks, look at the LME stock figures and see that tin, still, is a bit player on the world base metals scene.
Scanning the 52-week highs of this week, zinc stocks reached 152,175t, copper 201,000t, lead 97,225t and aluminium 1.084 million tonnes.
And tin? Just 16,065t as its 52-week high. But on Tuesday the LME warehouses held just 6735t, so it is not surprising that the metal is holding at well over $US20,000/t.
Incidentally, McFadden wrote at length about the ITC’s attempts to limit exports to maintain the price.
These were a dismal failure – the metal was hidden in fishing boats and tyres, and in 1983 the equivalent of 10% of world consumption was smuggled into Singapore.
Think of recent Indonesian attempts to close down illegal miners and you get the feeling that not much has changed.
Tin is back. But we should never forget just how fragile a market it can be.
KAS Price at posting:
0.0¢ Sentiment: None Disclosure: Held
