Vertical Restraints Imposed by Buyers: The Secrétan Copper Cartel, 1887-1889

In 1887, Pierre-Eugène Secrétan, the manager of a large French copper fabricator, convinced many European banks and investors to back a syndicate, the Secrétan Syndicate. The express purpose of the Syndicate was to corner the market for copper and to manipulate the world copper price. Within a short period of time, the Syndicate secured contracts with the major international copper producers and controlled 80 percent of the world supply of new copper. As a result, the price of copper on the London Metal Exchange (LME) doubled, and profits were made both on the physical commodity and on mining-company shares. When copper flowed into the market, however, the Syndicate was forced to acquire massive inventories in an attempt to maintain the high price. Eventually, the Syndicate failed, and the price collapsed, causing the liquidation of some investors and the suicide of one.

Secrétan’s effort to control the global supply of copper revolved around his company, the Société Industrielle et Commerciale des Métaux, a large copper buyer. The Société bought copper from producers, using contracts that stipulated a price and a maximum quantity and promised to purchase all of the seller’s output. The restraints were thus similar to exclusive dealing and price and quantity setting. The restraints were unusual, however, in that they were imposed by a buyer on an upstream seller, not by a seller on a downstream buyer, as is normally the case.

During the 18-month period that the Syndicate controlled the copper market, vast profits were made, equally vast losses were incurred, and a massive redistribution of income ensued. Nevertheless, unlike well-known American trusts of the turn of the century, such as Standard Oil and American Sugar, little has been written about the Secrétan Syndicate.

In this article, I discuss the formation and collapse of the Syndicate and the role of vertical restraints in enabling the cartel to survive for as long as it did. I also quantify the effect of the restraints on supply, demand, and inventory holdings.

Finally, I take a broader look at commodity market corners—why they are attempted and why they are rarely successful—and their implications for antitrust policy.

I.    The Secrétan Syndicate and the Vertical Restraints

A.    The Syndicate

The late 1880s witnessed an ambitious scheme to manipulate the price of copper by cornering the world market for new supply. The operation, which is considered to be the first international cartel, was conceived and executed by Pierre-Eugène Secrétan (also known as Hyacinthe), a well-known French metal merchant. The Secrétan Syndicate, which lasted from October 1887 to March 1889, controlled 80 percent of new copper supply and caused the LME price to double. At the end of the period, however, the cartel collapsed, and the price fell back to pre-Syndicate levels.

Secrétan, who headed Europe’s largest copper-fabricating company, the Société, noticed that despite the low level of stocks and the rise in demand, copper prices had fallen continuously between 1882 and 1886. Moreover, falling prices were probably indications that copper speculators were selling short. Secrétan concluded, however, that prices would rise, and that the rise could be accelerated and substantial profits could be made if the Société were to acquire the bulk of the world’s supply of new metal. Furthermore, he was able to convince one of the largest financial organizations in Paris, the Comptoir d’Escompte, to support his scheme. The Comptoir gave the Société an initial credit of £2,500,000, and other French investors followed suit, including the Paris Rothschilds, the Crédit Lyonnais, and the Banque de Paris et des Pays-Bas. Finally, in early 1888, five foreign investors joined.

In October 1887, the Société began purchasing large quantities of copper. Moreover, it made no effort to hide its activities, and the price of copper on the LME rose from £39 per ton at the beginning of October to £80 per ton by December. Except for a short spike in mid-1888, the price hovered around that level until the Syndicate collapsed 18 months later.

To secure his advantage, Secrétan began negotiations with the major copper producers in Europe and North America. In January 1888, the Société agreed to purchase the specified maximum production of the leading Iberian and American producers at a fixed price. Secrétan subsequently negotiated similar contracts with many smaller producers. Ultimately, he entered into three-year purchase agreements with 37 producers.

Since secrecy facilitates corners, the lack of secrecy was important for the cartel’s performance. The Engineering and Mining Journal (EMJ) is the best contemporary source for the flow of information in the copper market. On October 28, 1887, the EMJ mentioned that the price of copper had risen, but attributed the rise to the normal workings of a market. Just one week later, however, when the price continued to rise, the EMJ noted that the boom started in Paris and that people were speculating as to its cause. By December 23, the details were known: the Syndicate was mentioned by name, the principal participants were listed, and the fact that they had cornered the market for Chilean copper bars was mentioned.

Although the global price of copper rose quickly, the weaknesses in Secrétan’s scheme soon became evident. First, when the contracts were signed, the price had already risen, forcing the Syndicate to pay a high contract price. Second, the high price generated an increase in world output of about one-sixth. That increase came not only from mines that were outside the Syndicate, it also came from mines that had signed contracts because, at the time that the contracts were signed, those mines were producing at less than full capacity. Third, producers that had not signed contracts began investing in both new and previously closed mines. However, the EMJ notes that it could take at least two years for new investment to come online and up to one year to open a dormant mine. Fourth, the supply of secondary copper nearly doubled. Finally, the high price caused the demand for copper to fall.

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