New Internationalist

Markets

Issue 299

Pulp fiction

Ex-metals dealer Peter Robbins tells the inside story.

MAKING $200,000 profit in a single day armed only with a telephone can give you quite a buzz. For 20 years I worked as an international metals dealer and gained something of a reputation as a speculator. Metals are regulated far less than other markets. With a bit of luck, a willingness to take a risk and a good understanding of how the market works, it's possible to make a lot of money.

Risk-taking is part and parcel of the industry. The buccaneering culture fits nicely with a free-market global economy. But now the free-trade economists have lost control of their own creation - they claimed the market would regulate the price of scarce metals by increasing their cost, reducing their demand and promoting efficient use. Instead the opposite is happening. More minerals are being extracted, but the cost of raw materials is decreasing. Taking inflation into account, the prices of most metals are about half of what they were 20 years ago.

When I first started in 1965 the industry was dominated by the giants established during the colonial era: Rio Tinto Zinc, Anglo-American, Union Minire and Hudson Bay Mining. These companies did not have large-scale manufacturing divisions and were dependent on profits from their mining operations. 'Gentlemen's agreements' existed to maintain the price of metals at levels that ensured a good return.

In the 1970s governments decided to gatecrash these 'gentlemen's' clubs. Countries introduced higher taxation, demanded shares in the mines and even nationalized them outright. Corporations were quick to realize that future profits would not come from the extraction process itself. One by one the gentlemen's agreements collapsed and prices tumbled.

Today many major mining operations are unprofitable - yet companies continue to extract minerals and metals in ever-increasing quantities. For instance, the Selebi-Pikwe nickel mine in Botswana, owned by the Government and a consortium of major mining companies, has been making a loss for over a decade.

Transnational companies can afford to carry on because most of them now manufacture products made with the metals and minerals from the mine. They benefit from cheap raw materials to make everything from window frames to jewellery. Meanwhile, poor countries have become dependent on mining but are getting less money for the minerals they produce. And the constant pressure to make a quick buck through selling natural resources has been heightened by the Majority World's increased debt to international banks.

Over the last ten years I have acted as an advisor to governments in their unequal struggle to understand the secretive and all too often dubious corporate activities. In 1990 I was asked to look into allegations made against Alusuisse, the Swiss mining and manufacturing conglomerate, concerning their operations in Sierra Leone.

In theory, control of national mineral wealth in Sierra Leone is in the hands of the Ministry of Mines. The Ministry occupies the fifth floor of a shabby tower block in the centre of Freetown, the country's capital and the setting for The Heart of the Matter, a torrid novel about betrayal by Graham Greene. The lifts have long ceased to operate and office workers have to scramble up and down the crumbling staircase, sweating in the Turkish-bath climate. The Ministry has no fax machines, no photocopiers and no computers. The electricity supply and telephone lines work only intermittently. Listless clerks sit on broken furniture leafing through sheaves of dirty, dog-eared forms.

Not surprisingly, the Government found it impossible to negotiate on equal terms with a company whose annual turnover is 30 times larger than the total value of the country's exports. Alusuisse spent more on its senior managers' recreation club at the mine than the country spent on its largest hospital.

The Government had been convinced by the company that the mines were barely profitable. It agreed to take a small annual fee rather than tax Alusuisse's profits. It was not told that Sierre Leone's bauxite was being sold to the Alusuisse's parent company in Zurich at about $18 per tonne while other countries were getting up to $30. Since Sierra Leone produced 1.5 million tonnes of bauxite each year, the difference in price added up to a sum roughly equivalent to their entire foreign exchange deficit.

During our many sessions of negotiations, Alusuisse's executives explained that they would be breaking Switzerland's penal code if they revealed the price at which they sold the bauxite to their customers. If the Government insisted on receiving a larger share of the profits, the company might have to consider pulling out of Sierra Leone altogether since the best and most accessible ore had already been mined.

Alusuisse wove its own tale of betrayal in Freetown. But the storyline is so common it reads like formulaic pulp fiction - Third World governments everywhere find their expectations of a tax bonanza swiftly evaporate as mining companies transfer profits out of the country and mineral prices internationally remain very low.

Much of the ravaging of resources is driven by the action of market players. Mines around the world strive to produce as cheaply as they can. Brokers search to get the best deals for their corporate clients. In the meantime, the price fluctuates constantly. Speculators then gamble on what producers and consumers are likely to do and how this will influence the cost of metals. Increasingly, buyers and producers find rampant speculation leaves their fate in the hands of these traders.

Brokers, who themselves buy and sell stock, conduct the business on the London Metal Exchange (LME) and the two massive New York commodity exchanges. They are keen to attract business from rich individuals and financial institutions who use the markets as just another way of making profits, just as anyone might bet on a horse race. The annual turnover of the LME in copper is 20 million tonnes - about twice the world's total copper output. Most trade on the metals markets has very little to do with actual buying and selling of minerals but much more to do with gambling on changes in their price.

Buying stock makes the price go up and selling causes it to fall. So if a player finds out that large quantities of a certain metal are going to be bought on a certain date, he or she can surreptitiously purchase available stocks. This could cause the price of available metal to rise hundreds of dollars a tonne on that particular day. The player then sells their stocks at the inflated price, making a fortune, but causing the price of stock to fall again. This practice, known as 'squeezing a date' is a regular phenomenon despite the adverse publicity for the market it causes - in 1997 alone there was evidence of squeezing dates on zinc, copper and aluminium.

The beleaguered Chair of the LME, Raj Bagri, admitted that there was 'an unhealthy increase in market aberrations' but since the LME itself cannot prove who is behind this manipulation, he does not appear to be able to do much about it.

Nor is there any sign of the major industrial nations taking the international action necessary to curb this sale of Majority World resources. Indeed, rich countries have benefited enormously from low-priced imports. But, even if they had a change of heart, what realistic measures could be taken?

In the less-harsh economic climate of the 1960s and 1970s stockpiling was seen as a way of preventing the price of commodities like coffee, cocoa and rubber from falling too far.

But the election of Margaret Thatcher as Prime Minister and Ronald Reagan as US President heralded a complete change in attitude towards commodity markets. Prices of metals, they decreed, had to 'find their own level' according to the laws of supply and demand. Countries that had nothing but minerals to export simply had to find ways of cutting costs if they wished to survive.

In their scramble to attract mining-company investment, many poor countries have banned trade union activity and abandoned environmental protection. As bad practice drives out the good, tax dodging and bribery become widespread. Wages are lowered as countries devalue their currencies to compete with their neighbours.

Producing countries, which could not afford to create stockpiles in order to influence prices, looked wistfully at De Beers' control of the supply of diamonds. De Beers relies on its own money to support its stockpiling operations. It is bolstered by long-standing intimate relationships with Western governments and financial institutions. At De Beers' office in London there is reportedly a whole room filled with diamonds from floor to ceiling, slowly losing their sparkle as the dust settles. It's a unique example of stockpiling and price control but such methods are unlikely to be implemented to limit over-production of any other minerals.

Government stockpiling is also out of fashion. During the Cold War stockpiles were kept but these have now been sold, contributing to the chronic over-supply. Since the early 1990s the US Defence Logistics Agency sold more cobalt than Zaire, the world's largest cobalt producer, can generate in a year.

Producing countries could do more to control companies. They could outlaw the marketing of minerals through secretive tax-havens. Bribery can be curbed - given enough political will. International aid budgets could be used to empower governments with knowledge of company dealings. Majority World authorities could then exercise some supervision and be more aware of their rights.

Another approach might be to bring in internationally enforceable laws to protect the environment and enshrine workers' rights. Popular pressure ensures that mining activity in industrialized countries is controlled. If these controls were adopted by every country the cost of mining would certainly increase and the price of metals would have to rise. Exporting countries would benefit from higher prices, mineworkers' wages and conditions would improve and higher prices would reduce demand. This in turn would preserve ore deposits and reduce environmental damage.

But any attempt to control the international mining industry or curb the use of commodity exchanges for gambling purposes is fiercely resisted. Transnational companies are accustomed to writing the rules to suit themselves. And governments these days rarely intervene to control private industries until it is too late to do anything.

People are lured by the market to 'get rich quick'. But their wealth is only bought at the price of environmental degradation and poverty for many millions of people of the Majority World. n

Peter Robbins was a commodities trader who now acts as a consultant for the Commodity Market Information Service in London, Britain.

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