Smart Trade.

CITES (The Convention for International Trade in Endangered Species) banned trade in rhino horn in 1977, but trade did not stop.   All that happened was that trade went underground, where it flourishes.

Our rhino are under threat and it is costing us hundreds of millions of Rand (12 Rand=1US$) every year trying to protect them.   We are not winning the war.    There is a feeding frenzy going on and a need for urgency.    If we are to put a proposal to CITES on trade it needs to be next year.

Law enforcement, while essential, is not going to win, on its own. It is expensive, and difficult to manage over vast areas. The huge rewards to poaching encourage corruption, and corruption undermines law enforcement.

Demand reduction will also not work.  There are 1 billion people in China that use traditional medicines but because of the high price, only 1 million use rhino horn. (1 million buyers who buy a course of 6 grams p.a. totals 6 tons of horn or the equivalent of 1,500 horns.)   If you change the mindset of that 1 million there are still another 999 million in the queue, at lower prices.  It is a futile exercise.

Last year about 1,500 horn-sets were sold from Africa to the Far East.   1,500 horns were sold and 1,500 bought.  That was the extent of the trade. 1,400 rhino were killed, and 100 horns came out of stocks.  (These numbers assume that Kruger Park lost 100 animals in addition to the 827 carcasses found, and that 75 rhino were killed in the rest of Africa.)

Supply and demand were brought into balance at a price of $60,000 per kilogram. In total the value of the trade was R4.3 billion ($360 million), almost all profit, and all for criminals.  The high price limited demand.

The current situation is bad and all indications are that it will worsen.

Is there a better plan?

Well, we can satisfy the market, on a sustainable basis, by selling horn from stocks, and from natural deaths, and from farmed horn.    There is no need to kill even one rhino, in order to satisfy the demand.     All the killing is absurd.

Sensibly, South Africa is considering putting a proposal to CITES to permit a legal trade.   It should help the decision making process if there is a clear idea of what form trade will take.  There are some important choices.

At the one end of the spectrum is free trade, and at the other end is a highly controlled trade of a monopoly selling to a cartel of retailers, which I like to call “Smart Trade”.

Free trade implies that any one in possession of legal horn would be able to sell to anybody wanting to buy.  Most goods are traded in that way and buyers benefit from the competition amongst the sellers. Competition leads to lower prices.

But, in the rhino horn market you don’t want competition amongst the sellers, if it leads to a drop in the horn price, because that will lead to higher demand– demand that cannot be satisfied in the long term.   Again, price is critical.

A Central Selling Organisation, or CSO, that controls volumes and prices, would be a better plan. The CSO can sell 400 horns per annum from stocks, 300 from natural deaths, and 500 from farmed horn. That makes 1,200 horns.    Some poaching will continue, maybe 200 horns, and speculators will turn sellers of, say, 100 horns.  That will mean a total supply of 1,500 horns which will satisfy the market, at $60,000 — the same position as in 2014.

Private ranchers own 25% of the national herd, and should be given a quota to sell 300 horns. They will pay tax on the profit. The other 900 horns should be sold by Parks.  Both Parks and the private sector appear committed to helping communities along the borders of parks to farm rhino.    They can be part of the quota.

There will be no room for corruption.    Cheques will be made out by the CSO to National Parks, and to the various Provincial Parks, and to the Private Rhino Owners Association, and to nobody else.   The CSO will charge a 3% commission and 97% of the proceeds will go back into conservation.  The CSO will be owned by Government and act purely as a broker.

The plan is for the CSO to sell to a cartel of retailers, probably the Traditional Chinese Medicine hospitals, or TCM hospitals, in China. Those hospitals will be licensed, and in terms of their licenses, they will not be allowed to trade in illegal horn.  There will be no laundering of horn from the illegal to the legal market.

The assumption is that China will agree to be our partners in trade, subject to CITES first agreeing to trade.

The TCM hospitals are owned by the Chinese Government, and will make a profit on the trade of 1,200 horns, of some R1.7 billion ($144 million). They buy at $30,000 a kg from the CSO, and sell at $60,000, to the consumer.

(A word of caution: don’t translate the price of one 10 gram bauble into the average price at which 6 tons of horn traded. Commodity prices have been very weak and it is unlikely that the horn price has risen in those circumstances.)

The Chinese Government, being invested in the legal trade, will have an incentive to close down the criminal trade, and they will do just that.    Having the Chinese government as business partners is a critical advantage of “Smart Trade”.

I have not talked about Vietnam because it is my understanding that between 70% and 90% of the trade in Vietnam is in fake horn which is of little or no consequence to poaching.  I would be surprised if Vietnam represents more than 10% of total trade in genuine horn. After hundreds of years the market has not suddenly moved from China to Vietnam.  It is more likely that the Chinese have set up Vietnam as a trade route into China.  That is a mechanism to divert international criticism away from China.

Given a Smart Trade, illegal horn is likely to trade at a 30% discount to the legal trade price.    That is common in illegal markets and is because of the risk of being caught trading in illegal goods, and punished. Add to that risk, the risk that some of the horn in the illegal market will be fake, or poisoned, and the illegal price is likely to be at a 40% discount to the legal price.

The criminal trade will become much less profitable. Speculators will turn sellers because prices in the illegal market will be set for decline. Instead of buying, say, 300 horns they will want to sell, and even if they only sell 100, the turnaround will be 400 horns per annum.   Instead of encouraging poaching, the criminal syndicates will want to discourage poaching because poaching leads to more horn entering the illegal market and devaluing their stocks.

Given a Smart Trade the poachers are going to find it difficult to find a market for their horn. They will be forced into a small space where there is little volume.

In times of strong demand, the CSO can increase supplies.   When demand is weak, it can sell less. Having large stocks that it can access will be a great strength.  It can disrupt the criminal trade. It can limit demand to sustainable levels through the all important price mechanism.

A monopoly selling to a cartel is unacceptable in most markets but makes sense for rhino horn. CITES will find it more acceptable than a free trade.

You may fear that CITES will vote against our trade proposal. I doubt that. The ban is not working and there is a compelling case for a Smart Trade. But, CITES is a highly politicised organisation and logic and concern for rhino may not prevail. If we do fail, it cannot be “business as usual”.   Surely we are not going to tolerate our rhino being slaughtered, in order to humour CITES?   There needs to be an alternative plan, a response.   Thought needs to be given to what form that response will take.

Smart Trade is the simple solution to the poaching problem. It is simple by design because complexity destroys enterprise. It will not remove the need for law enforcement but it will reduce it and Smart Trade offers an extraordinary commercial opportunity for Africa’s parks and people.   I think it is the best option for our rhino.


Michael Eustace.