Tintinnabulation

The mysterious metals buyer

The London Metal Exchange, housed in a grand stone edifice on Fenchurch Street, exudes an air of ultramodern, professional efficiency. The 29 brokers sit in a circle on red leather banquettes surrounding the marble trading floor and make bids on seven metals (copper, lead, zinc, aluminum, nickel, tin and silver). For the past eight months, however, the exchange has been in turmoil. While prices for other commodities have been falling, the price of tin has been rising steeply. Since July, it has shot up nearly 30%, to more than $7.50 per Ib.

The mysterious surge in price has spurred memories of the abortive attempt by Bunker and Herbert Hunt to corner the silver market in 1980. Now, as then, an unidentified buyer has been spending huge amounts of money to drive up the price of a metal. More than $500 million has been invested, and 30,000 tons of tin have been stockpiled in European warehouses. Speculators who gambled that the price of tin would soon fall face financial ruin. Major tin consumers have escalating costs. Says a spokesman for U.S. Steel, which makes tin-plated products: "Of course this is hurting us."

For 25 years, the tin market was a model of orderliness. Three countries in Southeast Asia--Malaysia, Indonesia and Thailand--account for two-thirds of the world's tin production. Since 1956, they and other producers have had a series of five-year agreements with consuming nations to prevent price fluctuations and stabilize supplies. Last July, however, the consensus fell apart. The Reagan Administration, which does not like deals that distort free markets, declined to sign a new five-year contract.

Prices on the London Metal Exchange then began moving upward, as someone started buying large amounts of tin. At first, no one knew who the buyer was: orders were placed through Marc Rich & Co., a secretive New York commodity trading firm, and executed by Maclaine Watson & Co. Ltd. As the heavy purchases continued, it became apparent that only the world's major producers would have the muscle to control the markets, as well as the financial incentive to risk millions of dollars. Says one industry insider: "The general feeling is that Malaysia, Indonesia and Thailand got together and decided that if they couldn't get a higher price, they would buy all the tin available and move the price up."

In fact, Malaysia has already begun a series of informal meetings with the goal of setting up a "Tinpec," a cartel similar to OPEC, that would attempt to control world supplies and prices of tin. It even wanted to supplant the London futures market with one of its own, in its capital city of Kuala Lumpur. As if to show that the cartel was already working, Malaysia announced this month that it plans to cut its production by 25%, to 45,000 tons, thus driving up the price.

Any attempt to create a tin cartel is likely to founder on some hard economic realities. The metal is mainly used to plate the steel in so-called tin cans. Canning companies use tin because it resists corrosion that can be caused by acids often found in foods. Tin consumption, however, has been declining for years. More and more food is being packaged in sealed plastic pouches, and tin users are experimenting with such substitute materials as aluminum.

Another roadblock to Tinpec is the U.S., which has stockpiled 200,000 tons of the metal as a strategic reserve to be used in case of war. The tin was bought three decades ago for an average price of only $1.08 per Ib., and the General Services Administration in the past four months has sold 6,470 tons of it for up to $7.49 per Ib. Says Roy Markon, a GSA commissioner: "Why should we be worried about a contrived shortage? It is of great benefit to our sales program and good for the taxpayer."

A market showdown could come this week when speculators must deliver tin contracts that they have sold. Earlier this month, the London Metal Exchange eased its financial requirements, limiting he amount of money traders can lose. If the speculators are forced to liquidate more of their holdings, however, the Malaysians will have an opportunity to buy additional tin. The larger questions that remain unanswered are whether Malaysia and the other major producers can maintain an artificially high price for tin, and whether a residue of political bitterness will continue over the Reagan Administration's attempt to inject an element of free trade into the tin market.

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