UNCTAD-VII: TIN COLLAPSES NO REFLECTION ON COMMON FUND VIABILITY.

Aug 1, 1987

UNCTAD-VII: TIN COLLAPSES NO REFLECTION ON COMMON FUND VIABILITY.

GENEVA, JULY 30 (IFDA/CHAKRAVARTHI RAGHAVAN) – As the entry into force of the common fund agreement – with Soviet participation and U.S. non-participation – is coming closer, the United Kingdom and a few other western countries appear to be trying to muster support for ways to block the first account of the fund from becoming operational.

The first account is to be used to finance buffer stock operations of international commodity agreements that associate themselves with the fund.

British, West German and some others make no secret of their view that the first account should not be activated, and in their view the commodity stabilisation pacts and buffer-stocking arrangements would not be useful.

British Trade Minister, Alan Clark told a press conference this week that the fund agreement had been negotiated ten years ago, a great deal had changed since then, and "the need to approach (the operation) with extreme caution is widely recognised".

In advancing this argument against the first account operations, the British and some others are citing the example of the collapse of the sixth International Tin Agreement (ITA).

However, G77 delegates and UNCTAD officials say that if the fund had been in existence, and if the ITA had associated itself with the fund, the events that led to the collapse of the ITA could never have taken place, and even if it had, banks and traders and other creditors who dealt with the ITA would not have found themselves with uncollectable debts.

When the sixth ITA began, of the 49.385 tonnes of Tin in the buffer stock of the fifth, 27.666 tonnes were transferred to the new agreement, while the balance continued to be kept under the fifth for liquidation.

The net result of the transfer of 27.666 tonnes of the fifth to the sixth agreement meant that the capacity of the new agreement to support prices was limited.

Moreover, the member-governments of the ITA were also reluctant to put up cash needed to enable the manager to continue to buy and support prices.

In this situation, the buffer stock manager, with the implicit or explicit clearance of the ITA’s executive board began supporting the price levels through forward by and sell contracts – buying at a fixed price, and offering to sell at prices prevailing in the market at the time of delivery.

Such forward operations need only a ten percent payment to cover the margins, and the ITA buffer stock manager was able to raise the funds by commercial borrowings in London in sterling and on the security of the tin in stock.

With the rise in the value of the dollar, and the linked Malaysian currency, tin prices in the London metal exchange in terms of pounds sterling rose. This enabled the ITA to borrow and service the borrowings, and maintain the value of the collateral on its ever-increasing commercial debt without too much trouble.

At the same time, the value to be defended in non-dollar currencies (at a time of oversupply in the market and the recession-induced fall in demand) was increasing.

But the situation began turning in 1985 when the size of the stocks increased, while the dollar began to decline vis-à-vis sterling, thus reducing value in sterling on the tin held as collateral.

The buffer stock manager was finding it increasingly difficult to match fixed price forward contracts against unpriced sales. Creditors began applying the squeeze on the ITA and its credit lines, and in the face of a sharp drop in prices the buffer stock manager was unable to support agreed prices and suspended his operations.

When the ITA finally collapsed, there were 62.136 tonnes of tin in buffer stocks – 25.157 tonnes on account of the fifth ITA, and 37.979 tonnes under the sixth.

Outstanding debts to banks were estimated at 340 million pounds sterling, and there were contractual commitments for forward buying of 63.504 tonnes at an average 8.900 pounds sterling a tonne, and forward sales of 59.100 tonnes at prices prevailing in the market on delivery or near about that date.

The significant drop in prices, and the difference between the priced forward purchase contract and the unpriced sales contract, meant that the collateral held by banks and brokers lost their value considerably and the Council had no funds to meet its commitments.

But if the fund had been in operation and the ITA had associated itself, financial relationship and arrangements would have been stricter, s required by the fund articles.

The ITA (or any other associating International Commodity Organisation, ICO) would have had to deposit in cash with the fund one-third of its Maximum Financing Requirements (MFR) which would have been specified in the association agreement, based on the maximum stock and an appropriate acquisition price.

Also fund members participating in the associating ICO, would have had to provide directly to the fund guarantee capital (or cash in the case of non-members of the fund in the commodity organisation) equal to two-thirds of the MFR.

The fund would provide the ICO concerned resources to acquire stock, and the ICO would turn over to the fund stock warrants of the acquired stocks as collateral.

The ICO concerned would have had to commit itself not to borrow form other sources for buffer stocking. There would also have been other provisions in the association agreement to ensure financial control and viability of the buffer stock operations.

The buffer stock manager of tin would not have been able to undertake forward buy and sell contracts, nor would he have found any need for it.

Even, if it had been more advantageous to do forward buying and selling, rather than actual stocking, so that no costs for carrying stocks are incurred, the common fund would have insisted on the one-third cash deposit and two-thirds government guarantees for the value of the forward purchase contracts (and not the ten percent cash margin that brokers demand).

If the bottom had dropped out of the tin market, and the value of the stocks or collateral had fallen drastically, the fund would still have been able to call up the guarantees from the member-governments to satisfy the creditors, and there would not have been the kind of losses now incurred by banks and brokers.

The crisis and collapse could have taken place only if the ITA had refused to associate itself with the common fund.

G77 diplomats, and those involved in the negotiations at that time, recall that both the major industrialised consuming countries and important producer/exporters were cool to the fund and would not commit themselves to association.

They used to argue that tin and natural rubber were "hard" commodities unlike cocoa or sugar, and that the importing and major producing countries could themselves raise the necessary funds from the market.

At that time, the British and others (opposed to the fund) also used to argue that the fund (with a large third world decision-making voice) would be lax in its financial arrangements with commodity organisations, whereas consuming governments representatives on the organisations would be more strict.

No one could say now how the fund’s administration would have been, but the provisions of the agreement are specific. But at least in tin, government representatives were lax, since they did not want to take the hard decisions of providing finance.

G77 delegates suggest that keeping all these in mind, the British, German and others – who do not like commodity pacts – should at least be fair and not use the ITA experience to try and abort the common fund’s first account operations.