RPT-LME's tin users say market is "disorderly"

Thu Oct 1, 2009 4:44am EDT

Related Topics

* LME's lending guidance should be stricter

* No shortage of tin, surplus expected this year

* Source says LME should impose position limits on tin

(Repeats Wednesday story to widen distribution)

By Pratima Desai and Humeyra Pamuk

LONDON, Sept 30 (Reuters) - The tin market on the London Metal Exchange is "disorderly" and prices are distorted as latest data shows one entity controls more than 90 percent of stocks and cash contracts, industry sources said.

Members of the LME's Tin Committee told the exchange earlier this year it needed to take action. [ID:nL7149027]

Traders have for some months now warned prices do not reflect reality. Frustration with the LME is rife in the tin industry and many think the exchange should have acted before now to neutralise the position. <LME/WC>

"This is not a good situation and it certainly is not an orderly market," said a European tin buyer, which makes tinplate -- flat-rolled steel covered with a layer of tin.

"To have such a concentration of warrants by one single holder leads to prices higher than the fundamentals."

Many industrial users of the market say the LME's lending guidance, which limits dominant position holders ability to profit, should be stricter still. www.lme.com/5864.asp.

The cost of borrowing metal for one day flared out to $70 a tonne on Tuesday and was at $10 a tonne on Wednesday. <LME/MATCHED>

Tin stocks in LME warehouses stand at around 25,000 tonnes -- about 25 days global consumption. The tin market is expected to see a surplus of 5,000 tonnes this year. COMMODITYPOLL01

COMPLETE NONSENSE

The dominant holding has raised the spectre of tin shortages in the near term and pushed the premium for cash material over the three-month contract to $730 a tonne last week.

However, one source said the original long dominant position holder might have scaled back the size of his holding, but that others may have taken up that slack.

"The tin market is a complete nonsense at the moment, prices do not reflect what is going on in the real world," one senior tin market source said. "There is no shortage of tin ... the exchange needs to impose position limits."

The LME has previously said position limits are a tool for managing the effect of dominant positions in contracts with monthly or less frequent settlements. [ID:nLT20930]

The premium or backwardation for cash material over the three-month contract is around $650 a tonne from about $260 on Sept. 17. MSN0-3 [ID:nLN605546]

"Trade customers are extremely unhappy. But there's nothing illegal going on so they can't actually do anything about it," a senior trader on the LME floor said. "It's all within the rules but there are loopholes being created."

The persistence of this backwardation despite ample supplies of physical tin could be one reason why, according to one source, the LME's Special Committee may be looking into the dominant holding. here

The Special Committee meets quarterly and includes the LME's head of regulation and compliance Diarmuid O'Hegarty.

The LME would not say whether the committee has met recently, is meeting or is due to meet some time soon.

If the Special Committee suspects improper trading, which is affecting or is likely to affect the market, it can after consultation with the clearing house take action to rectify the situation and direct members to close or reduce positions.

Three-month LME tin MSN3, at above $14,000 a tonne, is up more than 40 percent since the start of the year.

Around 360,000 tonnes per year of tin is used globally, the bulk of which is produced by China followed by Indonesia.

The London Metal Exchange would not comment on any aspect of this story. (Reporting by Pratima Desai; editing by Camila Reed)

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