Saturday, 25 November 2006

Percaturan Ekonomi Di Zaman Tun Dr Mahathir: Bahagian 3

Maminco is born
There also was an ideological twist to Dr. M's cornering gambit, one that had long shaped his vision of the world and would reappear in other manifestations throughout his reign. In the case of tin, Mahathir maintained that the industrialized nations of the world have persistently victimized the commodity-producing Third World by under-pricing raw and semi-finished goods, while maintaining a hefty profit margin for their finished products. It was after the ITC rejected the tin-producing nations latest demand in July 1981 for higher prices that Dr. M launched his secret effort to corner the market.

Anticipating the rejection, Dr. M instructed MMC to incorporate a Malaysian subsidiary, Maminco Sdn. Bhd., to conduct trading operations. Corporate records indicated at the time that the company's total paid-up capital amounted to the equivalent of 76 US cents, while its authorized capital initially was set at US$76 million. The paucity of cash, however, presented no problem. Bank Bumiputra was ordered to provide all the necessary financing.

For the next five months, Maminco gobbled up tin futures contracts on the London Metal Exchange, sharply driving up their prices. The company also bought physical tin in its home spot market. Dr. M was ecstatic; his risky maneuver was playing out as planned. Despite continued weak demand for tin, the producing nations were getting nearly 7 per cent more for their tin than they were before the Malaysian cornering exercise had begun, and the price of tin on the London exchange shot up to nearly US$7.50 a pound from $4.33. But the good times couldn't last long, as Dr. M should have known from the dismal history of past cornering conspiracies.

Rising tin prices naturally encouraged other producing nations to step up the pace of their own mining. Moreover, U.S. President Ronald Reagan's administration – in an effort to take advantage of the rising price and to help finance its own proposed steep tax cuts – announced that it would begin to sell portions of its own 200,000-ton strategic stockpile. These two factors eventually prompted London metal traders to undermine Malaysia's market-manipulating efforts by betting that tin prices would fall and not rise, as Dr. M had planned.

The plan gets out of hand

Up to this point, Dr. M's cornering scheme was only in mid-phase. It was intended to be, at least at this early stage, more of a price-support skirmish with consumers, rather than an out-and-out war against global metal traders and industrial buyers. But in a characteristically rash and bull-headed decision – one that should have tipped off the world's currency traders in 1997-98 about what to expect from Mahathir – the prime minister issued the battle cry by buying existing tin stocks ... FOR CASH. His earlier price-support tactic was based primarily on buying futures contracts, which cost a fraction of the actual price of physical tin and don't require the contract holder to actually buy the tin when the contract expires.

The only way that Dr. M's countermove could have worked in his favor was if he managed to financially shoulder his price support scheme long enough to either force traders to accept physical delivery of the tin at the higher price at the end of the contract or to push them into costly and embarrassing contract defaults. Mahathir's strategy placed Bank Bumiputra under sharply increased risk and financial strain. The institution was ordered to fully finance Maminco's tin buying, to bear the company's interest and carrying costs, and to cover its insurance expenses. The AWSJ reported that at the peak of Malaysia's cornering attempt, Bank Bumiputra and others had shoveled out US$570 million in various forms of credit.

Having amassed as much as 50,000 tons of tin, Dr. M planned to hold much of it in reserve. Though that in itself can be quite expensive, Mahathir had hoped to sell off batches of the mineral to cover the carrying costs – purchase price plus interest on loans plus storage plus insurance – of his operation. Here's when his understanding of economic fundamentals proved to be hopelessly unrealistic.

Economically pressed producers in other parts of the world, none of whom were clued in on the cornering effort or cajoled into joining, continued to churn our more tin to take advantage of the considerably more lucrative market. Thus, Malaysia would have had to acquire increasing amounts of tin on the spot market to support the world price of the mineral as supply mounted against still low demand.

More of those interfering foreigners
The London exchange made a hasty and controversial decision, which in hindsight probably saved Dr. M from committing Malaysia to the basket-case status of many Latin American countries of that decade. The exchange's officials, alarmed by the potential financial collapse of some of its biggest members who couldn't possibly cover the costs of their maturing tin contracts without wiping out their capital, gave those members an escape route. The exchange ruled that those who couldn't comply with the terms of their expired contracts could instead pay a per-ton modest fine for every day that a contract remained unfulfilled. This meant that those traders who sold tin contracts in the anticipation of falling prices, or shorted tin, were no longer obliged to buy physical tin on the Malaysian-controlled market at a hefty premium to cover their contracts.

Dr. M was obviously outraged, though at the time he couldn't vent his anger publicly. Malaysia had never admitted that it was the mystery buyer of the world's tin stockpiles. But the market knew better. Four years later, Dr. M finally fessed up, just before Malaysia's political opposition leader intended to air his findings in Parliament. And characteristically, he blamed "massive cheating in the London Metal Exchange" for killing the cornering scheme, which he said was intended to save the beleaguered tin industry.

Perhaps, but not likely. Sooner or later, Malaysia's financial resources would have been stretched to a breaking point, as the country shelled out more and more funds to acquire the rising tin production that was coming onto the market. This bind, ultimately, is what undermines most cornering operations. And even in the unlikely prospect that Dr. M's gamble succeeded, it easily could have crushed the London exchange, thus killing off the world's existing, relatively efficient and workable metal trading mechanism.

If you can't trust your co-conspirators ...
There also was another factor Dr. M hadn't taken into his calculations: the disreputable tin trader, David Zaidner. He was piggybacking onto Maminco's buys. The more tin Malaysia bought, the more he bought, taking advantage of the sharp price increases for his personal trading account.

Echoing Zaidner's earlier misadventure at Amalgamated Metals, Marc Rich executives became suspicious of his activity and decided to have a look at their trader's books. Alarmed by the magnitude of the company's exposure, the executives shut down Zainder's operations and immediately began dumping its tin holdings. By early March 1982, world tin prices had collapsed by more than 22 per cent. The trader was sacked. Dr. M's attempt to corner the market had crumbled. And by 1985, tin prices slumped to records lows.

Estimates of Malaysia's trading losses over this period range from US$80 million to as high as US$190 million. Dr. M's government has never cited an exact figure. To disguise the losses and to repay Bank Bumiputra, the government transferred corresponding sums to the country's then-ballooning budget deficit at the end of 1984.

… bersambung di Bahagian 4

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