MELTDOWN: Chapter III

Continuing the fictional metals trading tale by Geoffrey Sambrook. Chapters IV-VII will follow in daily instalments this week.

III

Max Eisenstadt wandered into Steiner’s room just before eight. By then, the dawn had broken, but the snow had got heavier and the day looked grey. The aluminium trader was a big man, a bit hunched now by advancing years, and with thinning grey hair. But his eyes still held the sparkle of a keen intelligence. Steiner gestured over to the conference table in front of the window and they both sat. A coffee pot and cups were arranged in the centre of the table, and Eisenstadt helped himself.

“So, Jakob, what do you need to talk to me and Matthias about? Have we been upsetting the regulators again?” It was a natural assumption; Metal-Exx’s buccaneering style was often anathema to the authorities who watched the world’s commodity markets. The traders didn’t really care; they knew they walked close to the line, but they also knew that Steiner and his colleagues in the legal department were red-hot in being sure they never crossed it. For all the “investigations” that had been undertaken into Metal-Exx, the company had never in its history been found wanting by the regulators. That didn’t stop the latter trying, though.

“No, no, it’s not that. It’s something more serious.” Steiner paused. What he had to say next was something he thought left in the dim and distant past, when Metal-Exx was just the new boy on the block. “I think we are heading for a cash flow problem, and I’m concerned about what that may do to our credit rating. Which in turn would adversely impact our borrowing cost.”

Eisenstadt rocked back in his chair and raised his eyebrows. “Are you serious?” he said, quizzically. “We’ve got cash coming out of our ears, haven’t we?”

“No, we don’t. We appear to have endless funding, as long as we keep turning over our trades. That’s how we operate. But…” There was a knock at the door, and Matthias Horner came in.

“Jakob, Max, good morning.”

“Morning Matthias. Come in, sit down,”

Eisenstadt acknowledged his younger colleague with a wave, and Horner helped himself to coffee and sat opposite Eisenstadt.

Steiner began again. “Mathias, I was just making a couple of points to Max. I’ll start again, now you’re here.” He paused and gathered his thoughts. “So, we have a wonderful business here, you guys and your colleagues are all running profitable trading books. However, when I look at the overall position, despite the profitability, we are running into a crunch situation where all our resources are tied up, yet we will still have payments to make. In other words, we will run out of cash. Now, the reason I wanted to discuss this with you two specifically is that there seem to be two root causes of the issue. First, we have very large amounts of capital – both our own funds and bank borrowings – tied up in financing deals. In fact, on the back of that, we are pretty much at our borrowing limit.” He held his hand up, as Eisenstadt tried to speak.

“Wait, Max. I’m not criticising. It’s a good business, and we all agreed to maximise our involvement. If we put too much in, well, it was a joint decision. We’re not here for recriminations, I want us to find a solution. Now, the second issue is that the way the copper price has performed means that the copper book has effectively overpaid against Chinese concentrate sales. Again, the underlying deals are perfectly sound, but there’s a timing issue.

“Those two facts together are what are squeezing us. They’re what you might call the internal factors. There are also some external issues. First, along with every other quoted resource company, our equity is getting hammered. In fact, we are probably being hit harder, because we are a trader and the world and his wife know we rely on borrowings and don’t have a balance sheet stuffed with hard assets. So the vultures are circling. Using the equity market to raise cash at the moment therefore would be pretty much impossible. At the same time, as I said before, we are effectively at our borrowing limits, without seeing a hike if our overall cost. In other words, if we ask the banks for more, they will raise the cost of our existing money, according to the loan schedules.

“So, we’re squeezed in the middle of all this. Before we go any further though, there is just one thing. Matthias, I see from the accounts that Congo Copper not only will be owing us money pretty consistently while the price is here, but that they have already deferred a couple of payments that were due in recent days. What’s going on there?”

“Well, you know we have a pretty close relationship with them. We always have had; we take virtually everything they produce, so we treat them a bit differently from a normal arms-length supplier. So we’ve always been prepared to give them a bit of flexibility if they ask to delay payments – we charge them, of course, but we normally give them what they want. It’s worked pretty well to now.”

“Mmm. Right now we can’t afford it. You need to tell DeWet Steyn he has to pay up and keep to the schedule. We have to finance ourselves before we start financing our suppliers.” Steiner gestured to the phone on the table. “Call him up now, and tell him to pay up.”

Horner hesitated for a moment, then shrugged. Pulling out his mobile, he scrolled through to find the number he needed and dialled the speakerphone in front of them.

“Hello, DeWet Steyn.” The voice was tinny coming through the speaker, but the South African twang was immediately recognisable.

“Hi, DeWet. It’s Matthias Horner.”

“Hey, Matthias, how are you, my friend? What makes you call so early in the morning. I’ve only just got in the car. Everything OK, I hope?”

“Well, yes, pretty much. Just one small issue I needed to raise with you. I’ve been working here with Jakob, and he’s asked me to give you a call to request you to pay those amounts left over from the end of last quarter’s business. The balancing payments, you know, against the provisionals.”

“I don’t understand, Matthias. You and I agreed that you would allow us to delay that until the end of this quarter.” Horner shot a guilty look across at Steiner, as Steyn continued.

“You know I can’t make those payments now; if I pay you, I can’t pay my workers, and if I don’t pay them, that closes down my mines. We agreed it was in nobody’s interest to do that. We’re both gentlemen, Matthias. We had an agreement; we can’t just change that now with no regard for the consequences.”

“Well, the point is, we need that money now, against our contractual agreements.”

“Come on, man. Don’t talk to me about contracts. We agreed something verbally. Do you want to close me down?”

“To be honest, in the current market, taking your production out for a while probably wouldn’t be a bad thing; you’re not making money right now.”

Steyn’s voice became a lot colder. “Is that a threat, Matthias? Pay us, or we force you to stop production? Is that where this is leading”?

Steiner decided it was time to intervene, before the conversation degenerated. “DeWet, it’s Jakob here. Nobody is making threats. I’m just trying to rationalise my cash flow and these amounts seem to be outstanding. I don’t see any records of us granting extra payment terms, but of course if we did, that would be different.”

“Listen, Jakob; I can’t pay you right now and keep my mines running. If I shut my mines, I’m in a financial black hole. You guys know this. So don’t call me at this time in the morning to threaten me. And if you’re thinking of going to the law, remember we all have tapes on our phones these days. I had a verbal agreement with Matthias giving me extra time.” The phone went dead as he hung up.

“That went well,” observed Eisenstadt. Steiner just glared at him.

Sitting in the back of his car in London, Steyn’s face was a mask of fury. He was a man with a high opinion of himself, who barely tolerated disagreement. Indeed, one (possibly apocryphal) story told of how he had arrived at one of his mines in the DRC for an “offsite” board meeting. As his helicopter touched down, one of his fellow directors – who had all made the long journey the day before rattling around in a convoy of Land Rovers – was heard to mutter to his colleagues, “Ah, I see the ego has landed.” He wasn’t going to let himself be pushed into a hole by anybody. But one thing Horner had said gave him serious pause for thought.

Chapters IV-VII follow daily, this week.

Geoffrey Sambrook 
editorial@metalbulletin.com