Tin: The End of an Agreement ISABEL MARQUES and PIERRE-NOEL GIRAUD Centre d’Economie des Ressources Naturelles, Ecole Nationale Superieure des Mines de Paris, 60, Blvd Saint-Michel, 72272 Paris Cedex 06, France 1. INTRODUCTION The end of the International Tin Agreement (ITA) is part of the general crisis in materials, which is the result of a structural slowdown in demand rowth combined with excess production The accumulation of sizeable stocks and the loss of control over supply by the producer country members of the Tin Agreement gave rise to a process of destabilization in the tin market, the most obvious consequence of which was the inability of the Buffer Stock Manager to continue to support the price fixed by the International Tin Council (ITC). As in the case of other markets, however, the destabilization of the tin market did not stem merely from a temporary imbalance between supply and demand, but rather reflects a new market reality in which producers are faced with stagnating demand. Aside from the consequences that the present severe crisis will inevitably have in reshaping the future structure of the tin industry, the end of the Tin Agreement has a deeper economic and political dimension which raises questions con- cerning the very principles and mechanisms of commodity agreements. The Tin Agreement is the only mineral com- modity agreement to have had genuine, lasting I capacity. 8 success. Certain characteristics of the tin market contributed toward that success. These are: (a) the intense geographic concentration of min- ing and metallurgical production, exports and metal consumption; (b) the low degree of vertical integration along the different stages of the chain; (c) the extent of direct or indirect control of states over production; (d) the low substitutability of tin in its principal uses. The insolvency of the buffer stock precipitated the tin crisis. On a more fundamental level, however, it was to the Tin Agreement itself to which many analysts attributed the responsibility for the present crisis. As they view it, the Tin Agreement fixed and maintained a price for tin that was too high and out of keeping with the market situation, thus stimulating the develop- ment of considerable production capacity, while at the same time encouraging substitution in its principal use.2 We do not entirely agree with this analysis. To our mind the structural developments which have taken place in the market depend only in a secondary way on price levels. These structural developments are: Miss Isabel Marques is a Researcher at CERNA and Dr Pierre-Noel Giraud is the Director of the Centre. Miss Marques acknowledges the support of CN Pq., Brazil. The reasons for the collapse of the Sixth Tin Agreement in 1986 are examined in the light of: trading in the London Metal Exchange (LME); changes the demand for tin; the policies of the member and nonmember States to the Agreement and the restructuring of the tin industry. Although the end to trading of tin on the LME marked the end to the Sixth Tin Agreement, the difficulties in the tin market are not due only to an attempt to maintain prices, but also to technical innovation and an aggressive successful business strategy by the produecrs of competitive materials, which in turn resulted in a declining market for tin. Natural Resources Forum 0 United Nations, New York, 1987 207
Transcript
Tin: The End of an Agreement
ISABEL MARQUES and PIERRE-NOEL GIRAUD Centre d’Economie des Ressources Naturelles, Ecole Nationale Superieure des
Mines de Paris, 60, Blvd Saint-Michel, 72272 Paris Cedex 06, France
1. INTRODUCTION
The end of the International Tin Agreement (ITA) is part of the general crisis in materials, which is the result of a structural slowdown in demand rowth combined with excess production
The accumulation of sizeable stocks and the loss of control over supply by the producer country members of the Tin Agreement gave rise to a process of destabilization in the tin market, the most obvious consequence of which was the inability of the Buffer Stock Manager to continue to support the price fixed by the International Tin Council (ITC). As in the case of other markets, however, the destabilization of the tin market did not stem merely from a temporary imbalance between supply and demand, but rather reflects a new market reality in which producers are faced with stagnating demand.
Aside from the consequences that the present severe crisis will inevitably have in reshaping the future structure of the tin industry, the end of the Tin Agreement has a deeper economic and political dimension which raises questions con- cerning the very principles and mechanisms of commodity agreements.
The Tin Agreement is the only mineral com- modity agreement to have had genuine, lasting
I
capacity. 8
success. Certain characteristics of the tin market contributed toward that success. These are: (a) the intense geographic concentration of min-
ing and metallurgical production, exports and metal consumption;
(b) the low degree of vertical integration along the different stages of the chain;
(c) the extent of direct or indirect control of states over production;
(d) the low substitutability of tin in its principal uses.
The insolvency of the buffer stock precipitated the tin crisis. On a more fundamental level, however, it was to the Tin Agreement itself to which many analysts attributed the responsibility for the present crisis. As they view it, the Tin Agreement fixed and maintained a price for tin that was too high and out of keeping with the market situation, thus stimulating the develop- ment of considerable production capacity, while at the same time encouraging substitution in its principal use.2
We do not entirely agree with this analysis. To our mind the structural developments which have taken place in the market depend only in a secondary way on price levels. These structural developments are:
Miss Isabel Marques is a Researcher at CERNA and Dr Pierre-Noel Giraud is the Director of the Centre. Miss Marques acknowledges the support of CN Pq. , Brazil.
The reasons for the collapse of the Sixth Tin Agreement in 1986 are examined in the light of: trading in the London Metal Exchange (LME); changes the demand for tin; the policies of the member and nonmember States to the Agreement and the restructuring of the tin industry.
Although the end to trading of tin on the LME marked the end to the Sixth Tin Agreement, the difficulties in the tin market are not due only to an attempt to maintain prices, but also to technical innovation and an aggressive successful
business strategy by the produecrs of competitive materials, which in turn resulted in a declining market for tin.
Natural Resources Forum 0 United Nations, New York, 1987
(1) The disruption of patterns of consumption, which began to stagnate in the mid-1 970s and to decline in the 1980s. This drop, more acute in the case of tinplate(where between 1979- 1985 tin consumption showed a decline of about 35%), in our view is more related to technological changes than to price levels.
(2) The loss of control over supply by the producer country members of The Tin Agree- ment. As will be discussed later, the dramatic rise of the Brazilian production and the rigidity of Bolivian output cannot be ex- plained primarily by high prices but, in the Brazilian case, by the extreme competitivity of its new mines and in the Bolivian case, by the structural dependence of its economy on tin exports.
In this context, the Buffer Stock Manager was unable to continue operating because his capacity for intervention became saturated. Hazardous operations on the forward market brought about a crisis of liquidity. What happened to the Buffer Stock, however, is only a manifestation of an accumulation of deepcr-lying stresses.
In this paper we first examine the role of change in demand and the role of producers who are not members of the Tin Agreement in bringing about the crisis. Second, we discuss its development and the rationales of the principal protagonists during this period. Before conclud- ing, we point out the major trends that appear to be emerging from the restructuring of the tin market .
2 . CHANGES IN DEMAND Tin is the only metal to have shown a net decrease in world consumption since 1973. Consumption in the market economy countries dropped from an annual average of 185,000 tonnes in 1977-1979 to about 150,000 tonnes in 1982-1983, subsequently climbing back up to an annual average 160,000 tonnes from 1984 to 1986. This renewed upturn, however, fell far short of restoring the earlier level of consumption.
This decrease in consumption is not explainable solely in terms of a slow down of world economic activity. Since the late-1970s tin has undergone a particularly sharp decline in consumption as a result of substitutions and technological changes.
The most spectacular drop is observable in the manufacture of tin plate, the principal use of the metal. Consumption in the main industrial coun- tries fell from a level greater than 50,000 tonnes in the early 1970s to about 30,000 tonnes in 1985.' This decline was the result of several distinct phenomena. (a) A reduction in tin unit consumption in the
manufacture of tin plate (from an average of 6Kg of tin per metric tonne of tin plate in 1979 to 4.8 Kg/tonne in 1948). This pheno- menon is in keeping with a general trend, observablc in all sectors of industry, towards economizing on materials.
(b) A reduction in tin plate consumption due to market losses in the packaging sector, where rapid strides have been made by aluminium and plastics. A distinction must be made, however, between packaging for solids (food products, in particular) and packaging for beverages.
(c) Developments in the area of food preserva- tion, in particular the advances in deep- frozen and vacuum precooked foods, which exhibit a rigid physical structure, have made it possible to use flexible materials such as aluminium foil, plastics or multilayer sheets. A significant share of the market traditionally occupied by tin-plate cans is being taken over by these materials in a process that is surely irreversible.
(d) In the area of canned beverages, tin plate has suffered primarily from the competition of aluminium.
Price differences alone cannot account for these substitutions. Thus, in the case of alumi- nium, for examplc, one observes rates of penetra- tion into the area of canned beverages that differ considerably from region to region: this penetra- tion has bcen quite spectacular in the USA, but far less significant in Europe and Japan.4
The breakthrough of the aluminium can in the USA can be explained in terms of a technological innovation (the two-piece can) and the develop- ment of easy opening, which were achieved by the aluminium industry before they were by the iron and steel industry and the overall situation of the US steel industry which was unable to withstand the commercial and technological aggressiveness
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of aluminium producers such as the Reynolds Aluminium Company.
Solder is a second use for tin. However, despite the boom in the electronics industry, the chief consumer in this field, the tendency toward miniaturization of components has brought with it a decrease in tin consumption.
There remains the chemical industry, in which tin has a wide variety of uses, some of which, such as organic compounds, are undergoing rapid expansion. It is unlikely, however, that in the medium term the increased consumption in this sector will offset the lower consumption in the other two.
One can therefore conclude that the decrease in use of tin and the adoption of substitutes stem only secondarily from relative price levels, and that the chief reason for the decline in tin consumption lies in technological innovations and the aggressive , successful business strategy of the producers of competitive materials.
Once the substitution trend was under way, however, the price demand elasticity of tin unquestionably increased. Today it seems clear that in those sectors where competition exists a drop in the price of tin is a necessary, albeit probably insufficient, condition to recapture or to hold on to those markets.
In the long term it would seem that the downward consumption trend of tin might be checked only by seeking out new uses for the metal. This, in any event, is a phenomenon common to most of the basic metals, and one the producers of these metals are aware of, as can be seen from the recent efforts by copper and aluminium producers to expand the outlets for their products. The Association of Tin Producing Countries, realizing this need, has also increased its effort to finance research and development by increasing the budget of the International Tin Research Institute.
3 . THE ROLE OF PRODUCERS WHICH
AGREEMENT The essential mechanism of the Tin Agreements was the assignment of export quotas to the member countries. The difficulty of regulating Supply throughout the duration of the Sixth Tin
WERE NON-MEMBERS TO THE TIN
Agreement despite quota restrictions on exports is generally attributed to the high price of tin. Prices, being too high, appear to have encouraged the development of production capacity in the countries that were not members of the Agree- ment, and consequently curtailed the ability of the member countries to control the supply of tin on the international market.
Up to 1981, 85% of world tin production (Fig. 1) was controlled by the signatory countries to the Tin Agreement. The withdrawal of Bolivia, which did not sign the Sixth Agreement, decreased this percentage to 71%. By 1985 the producer mem- ber countries controlled only 55% of the world output. However, this decrease in the level of production stems mainly from the fact that the members to the agreement alone bore the bulk of the effort to adjust production to the level of consumption, and not because of a significant increase in the output of non-member countries.
In fact, we observe that from 1981 to 1985 the non-member countries increased their production by 12,000 tonnes for concentrates and 14,200 tonties for metal. Between 1981 and 1984 these increases were only 5700 and 8500 tonnes, re~pect ively.~ If we confine oursclves to the three main non-member producers, we find that the increases in production in Brazil and in the UK (a consumer member of the Agreement) were prac- tically the same as the decreases in Bolivian production up to 1984 and exceeded the latter by 5600 tonnes in 1985 owing to a sharp rise in Brazilian production.
It can therefore be said that, at least up to 1984. the crisis in the rcgulation of supply was not so much the result of any large-scale increase in production by non-member countries, but rather the result of the fact that they did not participate in the process of world export control in the face of declining demand. This non-participation brought all the weight of regulation to bear on the Tin Agreement member countries-a burden which proved to be beyond their capacity to bear.
In addition, if we are to assign the proper role of high tin prices in the production of non- member countries, then we must distinguish between production capacities developed owing to their extremely low production costs from those maintained because of the high support price of tin. Brazil and Canada fall into the first
category, and Bolivia and the UK fall into the second.
3.1 BRAZIL
Brazilian production underwent a spectacular rise between 1982 and 1985. It jumped from 8300 tonnes in 1982 to 26,500 tonnes in 1985. As for exports, they went up by SO% from 1983 to 1984, reaching 13,200 tonnes, and were in the neigh- bourhood of 20,000 tonnes in 1985. This impressive increase was primarily the result of a single mine coming into production-Pitinga, in Amazonia.6
The increase in capacity presently taking place should bring Brazilian production to about 30,000 tonnes per year in 1988.
The Brazilian tin industry, however, is hetero- geneous.
Paranapanema, the owner of Pitinga, adopted an aggressive strategy founded on its highly favourable position as one of the truly low-cost producers in the world. The company's aim in accelerating the expansion in Pitinga was to take advantage of the high price level and increase its
share of the market before a sizeable price drop could force the shutdown of a significant portion of world capacity.
In the case of other Brazilian producers, what is at stake is somewhat different. Their production costs are definitely higher and the exhaustion of their reserves looms on the medium-term hori- zon. Any lasting price slump would threaten their existence.
Under these conditions, a collapse of tin prices would probably result in the concentration of the Brazilian industry. with Paranapanema coming out ahead, both nationally and internationally.
3.2 BOLIVIA
Bolivia did not sign the Sixth Agreement, probably because the country did not want to be bound by restrictions on exports.
The country witnessed a 45% decrease in its tin production between 1981 and 1985 (from 29,800 to 16,100 tonnes). The chief cause was the financial inability to make investments to improve productivity in mines which were near exhaustion and were characterized by an appreciable decline
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in ore grades. In addition, the deterioration of operating conditions in mines had given rise to political unrest which greatly affected production volumes.
Despite the very high production costs of the Bolivian mines, it is unlikely that a voluntary decrease in production would have taken place even if tin prices had not been kept high. Domestic politics and Bolivia's dependence on tin cxports, which amounted to 40% of its foreign- exchange receipts. would have provided a strong structural rigidity to the closing of marginal mines, at least as far as the public sector is concerned.
3.3 THE UK In the UK investments were made to rationalize and modernize the Cornwall tin mining complex. Inasmuch as production costs are estimated at 57500 per tonne, (1 ton =: 1.016 tonne) the incrcasc in production of these mines, although modest in world terms, was justified only by the existence of the Agreement.
Britain's principal producer of tin is RTZ. RTZ's investment in tin had two objectivcs.
(I) Upstream integration in order to supply its Capper Pass foundry in England. This was the reason for the investment made by RTZ in Cornwall and the Kemptville mine in Canada, which went into operation at the beginning of 1986 and has a capacity of 4500 tonnes per year.
(2) Reduction of the impact of the progressive character of the group's income tax by locat- ing part of its production within British territory.
In the case of RTZ we see that it was not only pricc, but also industrial and tax strategy, which explains its changing pattern of production. In any event, the UK was a member of the Tin Agreement as a consumer country, so while the Government did not oppose an increase in its domestic tin production, it kept it to a level below its consumption so as to maintain its status as a consumer country.
In conclusion, up to 1985, Bolivia was charac- terized for the bulk of its capacity by a high degree of rigidity on withdrawing from the market, irrespective of price levels, while Brazil,
being a very low-cost producer, decided to enter the market in an aggressive way which would probably have occurred independently of the price fixed by the ITC.'
In our opinion, therefore, it was not so much the high price level maintained by the Agreement that brought about the crisis, but rather a structurally unfavourable evolution of demand, combined with rigidity of supply of the non- member producers. Indeed, as a result of these two phenomena the burden of adjusting supply which fell on the Tin Agreement's three main producers proved to be too heavy-something that we shall now examinc.
4. ANATOMY OF A CRISIS 4.1 TIik EFFECTIVENESS OF EXPORT CONTROL
During the Sixth Tin Agreement, inventories grew larger8 despite the fact that the member countries subjected themselves to the longest period of imposed quotas in the history of the Agreement (see Table I).' The reasons for this are as follows: There was a furthcr decline in consumption, which had already been burdensome to the Fifth Tin Agreement. The buffer stock manager began buying metal during the sccond quarter of 1981; by the end of March 1982, he had acquired 23,500 tonnes of metal. Despite the introduction of quotas, in April 1982 thc buffer stock manager continued to be a net buyer of tin. During this time there were four factors which weighed on the market:
(1) Chinese tin exports from 3,300 to 4,800 tonnes per year in the early 1980s to an estimated 13,700 tonnes in 1985."
(2) Sales from American strategic metal stocks (negotiated at 3,000 tonnes per year).
(3) A rise in the smuggling of tin in the Southeast Asian countries. This smuggling was csti- mated at 18,000 tonnes in 1983 and 11,400 tonnes in 1984, and demonstrated the difficul- ties experienced by the member states in imposing quotas on their tin miners.
(4) The increased production by non-member countries.
These factors led to an unprecedented rise in tin inventories. estimated at approximately
Use primary tin consumption 161.6 152 140 140 152.3 151.1 160
Total 187.4 176.6 164.9 164.5 176.8 160.5 170 4 net imports--centrally planned countries 25.8 24.6 24.9 24.5 24.5 9.4 10 4
Surplusishortage 14.1 31.8 22 0.9 -9.7 2.8 -23.5
ITC estimate.
Source: Mining Annual Review 1986.
100,000 tonnes just before the crisis.” A greater reduction of export quotas might
have been contemplated to reduce the volume of inventories and stabilize the market; however, it appears that the flexibility limits of the producer countries had been reached. Even though the strongest reactions against the imposition of quotas came from Thailand, all of the producer countries suffered from the protracted imposition of quotas o n exports. This suffering took the form of a decrease in foreign-currency receipts and in the tax revenue of the state, diseconomies of scale in the most productive units, closing of marginal mines and unemployment. Conflicts between the industry and local governments flared up in the producer countries, albeit to varying degrees, depending on the amount of privatc industry. Thailand is the country where the clashes were thc most intense and smuggling was the most rampant. Because of the high taxation levicd on private tin miners it is estimated that 40% of national production was smuggled out via Singa- pore, which amounted to approximately 70% of the total contraband in the region.
The perseverance of the ITC in maintaining export quotas and its refusal to adjust its support price to market conditions may be traced to the inevitable incrtia of this type of organization, but in our opinion it also very clearly reflects a strategy of maintaining absolute income within the Tin Agreement.” The logic of the Southeast Asian producer states. which, owing to the dominance of Malaysia, controlled the dccision-
making process within the Council, might be justified in terms of a macro-economic calculation that established a relationship between the cost of financing the buffer stock and the level of income collected through price fixing.
However, this logic could be pursued only with effective control of supply. Putting off the adjust- ment to market conditions led to the accumula- tion of the Buffer Stock manager’s operating difficulties. of which the 1985 crisis only revealed their extent.
4.2 FINANCIAL CONSTRAINTS AND THE FAILURE OF
Thc difficulties of the buffer stock manager relate primarily to his limited financial capacity to soak up the excess supply, and the effects of the rise in the value of the US dollar on the price of tin, expressed in pound sterling.
The operating rules of the Tin Agreement imposed on the Buffer Stock a limit to the volume of metal it could buy to support the floor price.12 Inadequate financial means, however, forced the buffer stock manager into a dangerous ‘game‘ on the London Metal Exchange, made possible by the appreciation of the dollar.
The floor price for tin was set at Kuala Lumpur at 29.15 ringgit (Malaysian dollars) kg-’. In 1982 this rice was equivalent to approximately f7000 ton- . The rise of the American dollar starting in 1982 (extended to thc ringgit owing to the fact that it is tied to the dollar) pushed the pound price up to f10,500 ton-’ during the first quarter of
THE BUFFER STOCK
P
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1985. Despite the efforts of the buffer stock tonnage^.'^ this practice made the buffer manager to hold up the price on the LME on a stock highly dependent on price fluctuations. par with Kuala Lumpur, the price in Kuala During the period of the rise of the dollar, Lumpur benefited over an 18-month period from this type of dealing was possible owing to the a premium with respect to London which was on tendency for the price in pounds to rise; it was some occasions greater than &700 ton-’. Through- advantageous, inasmuch as the buffer stock out this entire period the buffer stock manager earned money that enabled it to finance was the sole buyer at Kuala Lumpur, reselling the buying on the Kuala Lumpur market. After metal on the LME at a loss. March 1985 the downward trend of pound
Malaysia (in fact, Thai miners) benefited from prices rendered it extremely onerous for the this situation due to the fact that i t alone was able buffer stock manager to maintain this type of to dispose of its output through Kuala Lumpur. operation. At that point it was foreseeable What is more, it threatened the cohesion of the that in the short term it would be impossible Southeast Asian producers, inasmuch as Indo- to support the floor price of tin without nesia and Thailand were compelled to finance additional financial resources. Malaysian production. l3
Finally, in March 1985 Malaysia agreed to price Some ITC members had announced their inten- flexibility below the floor, so as to eliminate the tion to furnish additional financial contributions premium over Kuala Lumpur. This decision came to the buffer stock in order for it to be able to too late, however-just at the point when the continue its price-support function. A delay in the dollar began to drop with respect to the pound, payment of a &60 million contribution by the giving rise to bearish speculation on the LME. three main Southeast Asian producer countries The buffer stock manager stepped in, supporting left the buffer stock manager with an overdraft the pound price and reversing the price differen- that forced him to request the suspension of tin tial in favour of London, often with premiums of trading on the LME on 24 October 1985. f500 ton-’. The buffer stock manager was at that time
This intervention was absolutely indispensable committed to the forward purchase of more than for the continuation of buffer-stock operations. 50,000 tonnes of tin. chiefly from LME members; However, after exhausting all of his legal financial this represented commitments totalling more than sources (bank credits guaranteed by warrant^'^) f550 million. These, added to the &300 million the buffer stock financed its transactions by borrowed from commercial banks, brought the recourse to two types of operation for which no Tin Council’s financial liabilities to approximately explicit provision was made in the statutory fY00 million. regulations of the Tin Agreement. Actually, when trading ceased. the buffer
stock‘s total debts were dependent on the evolu- (a) Borrowing from banks by means of cash sales tion of tin prices. Indeed, the amount of revenue
of tin simultaneously bought back on a from the 70,000 tonnes which it sold on a futures forward basis (under conditions which basis at an undetermined price in order to cover allowed for the payment of interest). The its price-support purchases depended on the cash members of the LME “ring” served as inter- sales price at the time of delivery. There would mediaries in these operations which gave the thus be a direct relationship between the future Buffer Stock manager the indispensable market price and the amount of the losses to be liquidity. sustained by the buffer stock’s creditors.
(b) Buying tin on a 3-month basis at prices fixed The minimization of losses for all of the by LME contracts and selling the equivalent institutions concerned (chiefly the members of to consumers, also on a 3-month basis, but the LME ‘ring’, the banks and LME itself, whose not at a fixed price. This price was to be the reputation was called into question) constituted cash price on the metal delivery date or an the stakes which shaped the elaboration of several average for that period. Despite the neutral salvage plans. character of the operation as relates to At the end of 4% months of negotiations the
efforts made, chiefly by the traders, the banks, the LME and the British Government itself, did not get beyond stating the differences of opinion between all the principals, i.e. Governments of the consumer and producer countries which were members of the ITC. All attempts at im- plementing a salvage plan ended in failure.
The reluctance principally on the part of France, Germany and the Netherlands and the refusal of Indonesia, followed by Thailand, to financc TinCo put an end to the hopes of organizing an overall salvage plan.''
When prices fell abruptly on the free market which had developed outside of the LME after trading had been suspended there for 6 months, the LME fixed a day and price for the liquidation of unsettled contracts, immediately after ITC made known its refusal to agree to the salvage plan. The price was fixed at 26250 ton-', which represented an arbitration between the price level at the time when operations were suspended (it3140 ton-') and the price obtaining in sales on the free spot-market (approximately f4000 ton-').
By permitting the compensation of the unsettled contracts at a price of 26250 ton-' the LME adopted a compromise solution which saved a few of its brokers from bankruptcy. Despite the sizeable reduction in losses, which were estimated at El80 million, but which could be as high as $300 million, if onc takes into account the physical volume of metal held by some of the 'ring' firms, the firms will be forced to write off considerable amounts against their profit and loss.
Thus ends the history of one of the oldest contracts on the London Metal Exchange: in the medium term no further transactions in tin will take place on the LME.
We can now ask some qucstions about the factors that prevented the setting up of a salvage plan which, as it was conceived, seemed to satisfy the requirements of the consumer countries, thc producer countries1' and the creditors of the buffer stock. Considerations of a political and economic order appear to have grouped certain countries together and provoked conflicts within each block of countries.
5. THE RATIONALES OF THE PROTAGONISTS IN THE CRISIS
5 .1 THE CONSUMER COUNTRIES
The consumer countries are the principal benefi- ciaries of the end of thc Tin Agreement. Their pressure to reduce prices and their reluctance to commit themselves in salvage plans bear witness to the interest of the consumer countries in the disappcarancc of the former Agreement. For them there is no doubt that the volume of metal available on the market will probably keep prices down in the medium term, without any major fluctuations.
Yet the UK Government took great pains in approaching the rncmber States of the Agreement with a view to obtaining their support for various salvage plans. Despite the investments made in the Cornwall mincs and the political problems of a region racked by unemployment, the commit- ment of the UK is explainable chiefly in financial terms: some doubt had been cast on the corporate image of the LME, the oldest and most presti- gious international metal trading institution- which, incidentally, brings in more than f200 million in foreign exchange each year-and in addition, there was the reputation of the City of London to consider, one of the world's most important financial centres.
5.2 THE PRODUCER COUNTRIES
The failure of the negotiations, from the stand- point of salvaging the buffcr stock, marks for the producer countries the end of the rentist rationale in tin mining. A gross calculation shows that the contributions of thcsc countries to an organiza- tion of the TinCo type would have been rapidly recovered through export receipts in the event of a successful price support at a level of 26000 ton-'. In addition, the shutdown of marginal production units would probably have been far less brutal and more controlled.
The refusal of Indonesia and Thailand to contribute financially to the salvage operation shows a break within the Southeast Asian produc- er countries, isolating Malaysia from the other producers. This rift seems to fit into an economic environment-notably the competitiveness of the tin industry in Southeast Asia. We shall attempt a survey of this environment.
The effort to control the market, supported chiefly by the three Southeast Asian countries, sorely penalized the competitiveness of their industry vis-d-vis other countries such as Brazil,
NRF VOL. 1 1 , NO. 3: 1987 TIN: THE END OF AN AGREEMENT 215
which took advantage of the situation to expand their production capacity and thus obtain con- siderable economies of scale.
The imposing a 60% operating level on the industry for more than 3 years seems to have reduced the profitability of some production units. owing to an increase in unit costs. Furth- ermore, in the view of the producer countries the TinCo proposal to maintain export quotas for an additional 3-year period and a price of 26000 ton-’ would have resulted in the long term in the deterioration of operating conditions in the indus- try, with a great number of smaller mines being forced to shut down.
Indonesia’s refusal therefore seems to reflect its determination to persue on its own the restructur- ing of its industry and to make the long-term investments needed to restore its competitive- ness. In do doing, P. T. Tambang Timah is preparing to withstand the competition of Brazil, even if this means eliminating other producers. The determination of this country is understand- able chiefly in terms of its position on the curve of industrial costs.’8
As far as Thailand is concerned, its refusal to accept thc TinCo proposals in their entirety also stems from its taking into consideration the competitiveness of its industry, which is predomi- nantly privately owned. For Thaisarco, the coun- try’s only metallurgy works that is not integrated with mines, the drop in tin prices in no way affects the profitability of its operations. On the con- trary, in the medium term it will probably permit wider profit margins owing to a rise in operating level, and the end of the obligation to buy concentrates at Kuala Lumpur prices and sell them after processing at LME prices. The posi- tion of the Thai state, however, seems to have more to do with considerations of a political and fiscal character, prompted by the aggravation of tension between the tin miners and the govern- ment and the high degree of tax avoidance due to smuggling. The government’s policy of tax reduc- tion and its refusal to maintain constraints on industrial operating levels appear to have been aimed at easing the political tensions which existed between the government and the tin miners.
The maintenance of rental-oriented behaviour by Malaysia. on the other hand, can be explained
in economic terms. This country, which greatly benefited from the Sixth Agrecment, was the most sorely penalized by the failure of the salvaging plans. Indeed, the lack of competitive- ness of Malaysian industrial operations became highly visible as prices fell.I9
6. THE RESTRUCTURING PRESENTLY TAKING PLACE
The dramatic drop in tin prices following the collapse of the 6th Tin Agreement is of a lasting character, owing to the large overhang of tin on the market. It has given rise to a whole series of adaptative measures on the part of industrial operators. These measures depend more on the position of the curve of production costs than on the public or privatc nature of capital. In this context, two groups of producers can be identi- fied.
6.1 LOW-COST PKODUCERS
The low-cost producers have chosen to increase production volume in order to bring economies of scale into play at thcir most efficient mines, while closing down the less competitive operations. Reducing operating costs and rationalizing in- dustrial operations are therefore the favoured strategy of this group of producers.
This is particularly true of Paranapanema, whose Pitinga expansion project should be com- pleted in 1988. In order to guarantee outlets within the current difficult business context, the firm has signed a saledmarketing contract with the Cookson group, the world’s largest tin con- sumer, for part of its output.
P. T. Tambang Timah has also tried to reduce cost and increase production, though its efforts to increase annual production from 22,000 to 27,000 tonnes do not appear to have been entirely succcssful. In addition, the principal Australian producer, Renison Goldfield Consolidated, fol- lowing the same strategy, has managed to reduce its production costs by one-third, while operating its mine in Tasmania at full capacity.
Some of these firms have embarked upon a strategy of diversification aimed at reducing their vulnerability in the future from tin. This is the case of Paranapanema: in the mining sector, aside from gold production it is seeking diversification
in special metals derived from the by-products of its Pitinga mine. As for P. T. Tambang Timah. it has announced diversification into the production of useful substances and industrial minerals.
6.2 HIGli-COST PRODUCERS
The ineluctable fate of most very-high-cost opera- tions has been the same: shutdown. This has been the case of many operations in Thailand,”’ Malaysia, Bolivia. the Greevor Mines in the UK and Aberfoyle Ltd in Australia, to cite the main examples.
Mention must be made, nevertheless, of the decisions of the governments of Malaysia and the UK to subsidize a few operations in Malaysia” and in Cornwall,22 respectively. Their interven- tion was designed to support operations which were apparently not competitive in a period of low prices, in the hope that a rise in prices would enable them to stay in operation in the future.
The future of thc East Kemptville mine in Canada remains uncertain. The opcrator, Rio Algorn (subsidiary 52.8% owned by RTZ) has abandoned the operation and left the responsi- bility for kecping it in business to the banking syndicate that financed its d e ~ e l o p m e n t . ~ ~
The shutdown of high-cost marginal operations was reflected in a shortfall estimated at 24.000 tonnes of tin on the market in 1986, taking into account Chinese exports and the imports of the Eastern European countries.
Price recovery today constitutes the primary objective of the producer countries belonging to the Association of Tin Producing Countries (ATPC). With a view to achieving this, the Association is seeking commitments on the part of producers. especially Brazil and China, to limit exports, the purpose being to drain off inventor- ies, which are still estimated at 70-80,000 tonnes, and also to reach a compromise with the bankers, who are still in possession of sizeable quantities of metal, in respect of their policy on sale^.'^
The low price level in 1986, however, has not had a visible impact on demand; this seems to demonstrate the lasting character of the stagna- tion of the market. The prescnt price level is dependent mainly on the sales policies of the ITC creditors. It is in their interest, however, to minimize their losses, and this will probably lead them to wait for a price recovery, spreading out
their sales in time. Nevertheless, the existence of this stock is itself a factor that exert5 a downward pressure on tin prices.
7. CONCLUSION
The principal cause of the collapse of the Tin Agreement. in our opinion, is to be found primarily in the rigidity of production in the face of a decline in consumption. and not any main- tenance of excessivcly high prices by the Agree- ment. Thus, we again have an illustration of an empirical rule that may be formulated as follows: price control of a raw-materials market by pro- ducers in association with consumers is possible on a lasting basis only under conditions of an increasing demand.
This condition must be met in order for inevitable conflicting interests to be reconciled- interests that derive from different operating conditions, different economic environmcnts, and strategies that are not necessarily in agreement. When the demand slackens greatly, the conflicts flare up sooner or later.
If conditions again turn favourable, will we witness a new Tin Agreement of the same type as thc previous ones‘? In our opinion, no. Tin is no longer a strategic raw material for the industrial- ized countries. The likelihood of wide price fluctuations such as those that consumers had to endure in the past seems more remote, owing to the low probability of sudden increases in demand. In addition, the specificity of tin produc- tion units (dredges), capable of being put back into operation very quickly, is a factor that makes rapid adjustment of supply to demand possible. Furthermore, changes in consumer procurement policies have profoundly disrupted the traditional ties between producers and consumers: the ‘re- liability of supply‘ aspect has become secondary. Thus, the reasons that led consumers to join in an international agreement for price regulation have disappeared.
Neverthcless, maintaining prices at a very low level in the medium term, until the stocks have been sold and thc operations presently subsidized in Malaysia and the UK have fallen by the wayside, might once again create the conditions for a marketing agreement by the major producer countries. A decisive factor in this connection will
N R F V O L . 11, NO. 3,1987 TIN: THE END OF AN AGREEMENT 217
be the position taken by Brazil, where the political changes presently taking place may favour the adoption of this type of measure, in contrast with its traditional policy on non- participation in organizations or agreements among producers.
A marketing agreement among the principal producers would nevertheless require price-fixing at a sufficiently low level to prevent supply drift, for the price elasticity of supply will remain high. In contradistinction to classic-type of marketing agreement, whose objective is to create absolute
rents, what would be involved here would rather be a ‘market regulating system’, aimed simply at preventing the volatility of prices.
ACKNOWLEDGEMENTS
The authors acknowledge with appreciation the very accurate and helpful remarks made by Mrs. Frangoise Callot, France’s delegate to the ITC, on a first draft of this paper. However, all of the opinions presented are obviously those of the authors alone.
NOTES
1. On this subject, see Giraud, Bomsel, de Sa, 1985. La Crise duns l’lridusfrie Miniere, CERNA. 2. It is true that since 1Y82, owing to the rise in the value of the US dollar, the price of tin, while stable in
ringgit (Malaysian dollars), showed a far more favourable development in pounds Sterling than other mineral raw materials, thus maintaining suitable revenues for the producer states.
3. It should be noted that in Japan the iron and steel producers are far more dynamic and have developed an easy-open two-piece steel can; this will most certainly bring to a halt the penetration of aluminium in this area.
4. Its reserves have been estimated at 230,000 tonnes of contained tin and the estimated increases as prospecting work on the site continues. The average content is on the order of 2 kg m-3, i.e. three times as high as the average of other Brazilian mines.
5. However, the economic adjustment plan implemented by Bolivia since 1985 within the framework of the negotiations with IMF imposes budgetary constraints on the Bolivian state which will make it difficult to continue to subsidize mining operating losses by expanding the monetary base. Thus, i n 1985 Bolivia announced a plan for restructuring the activities uf Comibol that contemplates closing mines with very high production costs, so as to cut operating losses.
6 . The Tin Council. faced with the situation of a structural surplus of supply, has resorted to the assignment of quotas four times since its creation. Before 1982, the longest use of quotas was from December 1957 to September 1960, following the discontinuation of purchases the American strategic stocks (GSA), which put the industry in a situation of excess production capacity. The quotas always managed to maintain the floor price. It is likely, however, that maintaining such quotas over prolonged periods had the effect in the past of subsequently causing price escalations far above ceiling prices.
7. In March 1985 the buffer stock manager alone held 56,400 tonnes of metal: 24,200 tonnes left over from the Fifth Agreement and 32,200 tonnes corresponding to the Sixth Agreement, of which 27,800 tonnes were transfers from the Fifth to the Sixth Agreement by member countries. As of June 1983, however, the ITC noted its commitments in the forward purchase of 52,075 tonnes of metal and the forward sale of 71,210 tonnes. These future commitments, however, were not taken into account in the total amount of stocks controlled by the buffer stock manager.
8. The provisional character of the Sixth Agreement limited the buying capacity of the buffer stock manager to 39,666 tonnes, of which 20,000 tonnes were financed through loans and 19,666 tons represented donations of the member countries in lieu of the 50,000 tons scheduled for its definitive entry into force. The Agreement’s legal stocks on the date on which the buffer stock manager was declared bankrupt (24 October 1985) were 52,450 tonnes, relating to the Fifth and Sixth Agreements.
9. Indonesia estimated its annual loss due to the sale of its output on the LME rather than the Kuala Lumpur market at US$11.7 million.
10. The decreased volume of trading in the principal metals on the LME since 1983 and the status of the buffer stock as an inter-governmental institution explains the involvement of the traders in this type of operation, from which they derived commissions, interest and even gains.
218 ISABEL MARQUES & PIERRE-NOEL GIRAUD
11. After the banks, led by Standard Chartered, had proposed a f550 million loan to the Council, while at the same time the creditor banks agreed to reschedule their loans in the amount of approximately f350 million, the traders proposed the creation of an English company, TinCo, in which interests would be held and contributions would be made by the banks (the contribution of the banks and traders was to be f70 million) and the governments of the countries belonging to the Agreement (f250 million, with the UK contributing f50 million). Its aim was to hold the tin price level at f6000 ton-’ for a period of 3 years, deemed sufficient in order to sell off market surplus and stabilize the market, on the understanding that export controls would be maintained and marginal mines would be closed. The banks’ requirement that the member countries should put up guarantees and even participate financially gave rise to negotiating difficulties and the ultimate failure of the proposal.
12. In the case of Indonesia, for example, whose production was approximately 22,000 tonnes in 1985, it is estimated that a price decrease of f700 ton-’ (with respect to the level of f6250 ton-’) reduced its export revenue by more than El5 million, an amount equivalent to the country’s proposed contribution to the setting up of TinCo. cf. Mining J . (14 March 1986).
13. Timah employs 28,000 people and is being pushed by the government to hire more, owing to the country’s level of unemployment.
14. This is the case of the reintroduction of trough-washing, which made possible a production of 5000 tonnes in 1986; this amount is to be increased in 1987. cf. Metal Bull. (7 November 1986).
IS. The shutdown of small operations in 1985 resulted in unemployment for 8800 workers. A study by the Malaysian government estimates that only 22 mines, primarily dredges, with very few gravel-pump operations, could remain in operation at a tin price of f4000 ton-’. cf. Mining J . (21 January 1986).
16. In Thailand, where production dropped approximately 40% in 1986, exports are expected to be down in 1987 compared with 1986, owing to the exhaustion of the stocks existing at the mines, which had piled up owing to the earlier limitations on the industry’s operating level. This will result in severe problems of profit-making capacity at the country’s sole refinery, Thaisarco.
17. As relates to Malaysia, the intervention of the government in granting credit at reduced rates is intended to permit the survival of 170 mines capable of producing 23,000 tonnes of tin. In the absence of subventions, under present market conditions it is estimated that only 60 mines would be able to survive, with a total capacity of 12,000 tonnes.
18. Tn August 1986 the UK government decided to guarantee Carnon Consolidated, a subsidiary of RTZ, financial assistance amounting to f25 million (f1S million by way of relief from finance charges and a guarantee for a f10 million commercial loan), to be paid out of mining profits. The purpose of this ‘aid’ is to make it possible to continue the programme of modernizing and rationalizing the Carnon mines, which will have to achieve production costs of f5000 ton-’ within a period of 3-4 years.
19. This decision, taken owing to the operation’s unsatisfactory rate of return, derives from the low capital commitment of Rio Algom and the financial set-up, in which the banks took the assets of the project as security.
20. The Producers’ Association estimates the period needed for absorbing the stocks existing on the market at 16 months, provided that the production capacities now paralysed are kept closed and that Brazil and China can be prevailed upon to limit their exports by 26,000 tonnes and 4000 tonnes, respectively.
