The Tin Market Crash of 1985
In October of 1985, the International Tin Council (ITC) announced that it was insolvent, unable to pay its debts that consisted of physical tin and tin futures purchases.
International court cases that played out over the next three years, as metal brokers and banks attempted to recoup their losses, would show that the ITC had accumulated liabilities of nearly £900 million (US$ 1.4 billion), far more than anyone had imagined.
While creditors were left on the hook for the vast majority of these losses, the tin market as a whole effectively collapsed, resulting in mine closures and tens of thousands of job losses around the world.
What Caused the Collapse of the ITC and the International Tin Market?
The ITC was formed in 1956 as the operating arm of the International Tin Agreement (ITA), an association of states with interests in the long-term stability of the world tin market.
The ITA's objectives were simple but left much room for discord between members that represented both tin producer and tin consumer nations. Amongst its prime objectives were to:
- Prevent or alleviate widespread unemployment and other serious difficulties resulting from shortages or over-supply in the international tin market
- Prevent excessive fluctuations in the price of tin
- Ensure adequate supplies of tin at "reasonable" prices at all times
The ITC mandated two tools in order to achieve these objectives:
- Export controls
- A buffer stock of tin metal
In practice, the buffer stock was used to a far greater degree than export controls, which were not fully supported and difficult to enforce.
How the buffer stock operated included purchasing tin on the international market when prices fell below a target floor set by the organization in order to support prices. Likewise, the Buffer Stock Manager would sell material when prices exceeded the artificial target price ceiling.
Both producers and consumer countries saw benefits to this theoretically price-stable market.
In 1965, the ITA granted the Council power to borrow funds for the purchase of buffer stocks of tin.
After signing of the 4th ITA in 1970 (the Agreement was renewed in 5-year intervals beginning in 1956), a Headquarters Agreement was signed with the UK government that granted the Council legal immunities from jurisdiction and execution as it set-up operations in the City of London.
By the 5th ITA (1976-1980), the allowance of voluntary contributions to the buffer stock from consumer countries effectively allowed the size of the tin stock to double. The US, which had long held significant stockpiles of tin since World War II and had previously resisted entry into the Agreement also finally signed on to the ITA as a consumer country.
Nearing the end of the 5th ITA, however, disagreements over the objectives and scope of the Agreement led many participant nations to begin operating outside of the ITA, directly intervening in the tin market for their own self-interests: The US began selling tin from its strategic stockpile, while Malaysia secretly began purchasing the metal to support prices.
Malaysia's Tin Play
In June of 1981, under the guidance of commodity trader Marc Richie and Co., the government-owned Malaysian Mining Corporation set up a subsidiary to secretly purchase tin futures on the London Metal Exchange (LME). These covert purchases, funded by Malaysian banks, were designed to further support international prices for the metal, which were being depressed by a global recession, greater tin recycling and the substitution of aluminum for tin in packaging applications.
Just when Malaysia's purchases of futures contracts and physical tin looked to be succeeding, however, the LME changed its non-delivery rules, letting short sellers off the hook, and resulting in a sudden drop in tin prices of about 20 percent.
The 6th ITA, which was due to be signed in 1981, was delayed as a result of acrimonious relationships between members. The US had no interest in the ITC governing sales of tin from its strategic stockpile and withdrew from the Agreement along with Bolivia, a major producing nation.
The withdrawal of these countries and others, as well as the growing export of tin from non-member states, such as Brazil, meant that the ITA now only represented about half of the world tin market, compared with over 70 percent a decade earlier.
The remaining 22 members who signed the sixth ITA in 1982 voted to fund the purchase of 30,000 tonnes of stock, as well as borrow money to finance the purchase of another 20,00 tonnes of the metal.
In a desperate attempt to stem falling prices, the ITC further imposed export controls, but this was to little avail, as global production of tin had exceeded consumption since 1978 and the organization wielded less and less power.
The Council decided to intervene more heavily by also buying tin futures on the LME.
Efforts to entice large non-members to join in the Agreement failed and by 1985, recognizing that the current price floor was not defendable indefinitely, the ITC had a decision to make about how to continue to pursue its objectives.
Malaysia, a major producer and strong voice in the Council, stymied attempts by other members to lower the price floor, which was set in Malaysian ringgits. The fact that the target price was set in ringgits, itself, put further pressure on the ITC, as exchange rate fluctuations in early 1985 resulted in further declines in the LME tin price.
This drop put financial constraints on the ITC's creditors—tin producers who held the metal as collateral—just when the Council was running low on cash.
The Tin Market Crash
As rumors of the ITCs financial situation began to spread, the Council's Buffer Stock Manager, fearing a market collapse, urged members to continue financing the purchase of tin stocks.
But it was too little too late. Promised funds never arrived, and on the morning of October 24, 1985, the Buffer Stock Manager advised the LME that it was suspending operations due to lack of funds.
Due to the gravity of the situation, both the LME and Kuala Lumpur Commodity Exchange both immediately suspended trading of tin contracts. Tin contracts would not return to the LME for another three years.
As members could not agree on a plan to rescue the ITC, chaos spread through the LME, the City of London and global metal markets.
While Council members argued, the tin market ground to a halt. Mines began closing and, unable to meet obligations, major players were forced into bankruptcy. The price of tin, meanwhile, nose-dived from around US$ 6 per pound to under $4 per pound.
The UK government was forced into launching an official inquiry that ultimately revealed the extent of the ITC's losses. The Council's gross liabilities as of October 24, 1985, were found to be an astounding £897 million (US$ 1.4 billion). Physical stocks and forward purchases were far more than members had authorized and over 120,000 tonnes of tin—eight months of global supply—would have to be valued and liquidated.
As legal battles ensued, the tin market was in turmoil.
In the period following the collapse of the International Tin Council, Malaysia shut 30 percent of its tin mines, eliminating 5000 jobs, 40 percent of Thailand's mines closed, eliminating an estimated 8500 jobs, and Bolivia's tin production fell by one-third, resulting in the loss of up to 20,000 jobs. 28 LME brokers went bankrupt, while six others withdrew from the exchange. And the Malaysian government's covert scheme to prop up tin prices ended up costing the country over US $300 million.
By the time the dust settled around the legal cases against the ITA and its member states, a settlement was reached that saw creditors recoup just one-fifth of their losses.
Mallory, Ian A. Conduct Unbecoming: The Collapse of the International Tin Agreement. American University International Law Review. Volume 5. Issue 3 (1990).
Roddy, Peter. The International Tin Trade. Elsevier. June 30, 1995
Chandrasekhar, Sandhya. Cartel in a Can: The Financial Collapse of the International Tin Council. Northwestern Journal of International Law & Business. Fall 1989. Vol. 10 Issue 2.