COLUMN-Tin, a tale of two exchanges: Andy Home

Thu Feb 6, 2014 8:26am EST

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(The opinions expressed here are those of the author, a columnist for Reuters.)

By Andy Home

LONDON Feb 6 (Reuters) - This March the Indonesia Commodities and Derivatives Exchange (ICDX) will host a conference to drum up international interest in its recently launched tin contracts.

The official theme of the meeting will be "Guaranteed Supply and Guaranteed Quality".

Seasoned watchers of the international tin market might be forgiven for raising an eyebrow at that title.

Indonesia's drive to ensure that all exports meet minimum purity standards and be traded on the ICDX prior to customs clearance caused an almost complete cessation in shipments last September from the world's largest supplier.

Flows recovered over the course of the last three months of 2013 as volumes at the ICDX picked up.

But trading volumes dipped again in January, raising the question of whether there isn't a missing part of that conference title: guaranteed price.

While the explicit aim of Indonesia's new tin export policy is to wrest pricing from the current marketplace, the London Metal Exchange (LME), a thinly disguised secondary ambition is to achieve a higher price.

And it's the LME tin contract that is now showing signs of that tension.

TIGHTNESS

Front-month spreads on the LME have been tightening since the start of the year.

Not in the spectacular fashion seen last September, when the benchmark cash-to-three-month period CMSN0-3 flared out to $125 per tonne backwardation as the new Indonesian export rules kicked in.

The tightening has been more gradual but also more structural, with the whole forward curve moving into backwardation through the end of this year.

It has been underpinned by a steady slide in LME warehouse stocks. Headline stocks currently stand at 8,940 tonnes, which is close to a five-year low.

What is more, much of that total, 37 percent to be precise, is in the form of cancelled material waiting to be drawn down.

Open tonnage, the core liquidity base of the LME contract, is just 5,635 tonnes. <0#MSNSTX-LOC>

And that is problematic given the generous sprinkling of large positions, both short and long, across the next three months' prime prompt dates. <0#LME-FBR>

As things stand, any of those dates could feature cash-date squeezes as shorts try and cover against the historically low and dwindling stocks available.

LME stocks have been falling ever since the Indonesian export rules kicked in, and it's hard to see an end to this trend.

VOLUMES DOWN, EXPORTS DOWN?

Since the Indonesian authorities mandated that exports be traded on the ICDX before departure, there has been a strong correlation between its trading volumes and actual shipments, as shown in the next graphic. ******************************************************* Current Indonesian and LME tin dynamics: link.reuters.com/bun66v *******************************************************

Exchange volumes totalled 18,065 tonnes in the September-December 2013 period. Exports, excluding tin solder which is not yet subject to the rules, amounted to 19,198 tonnes.

Volumes, though, have dipped sharply in January to just 3,945 tonnes, which suggests a similar slowdown in export flows.

The question is why have they dipped?

There are two possible answers. One is that lower trade reflects less metal available for export due to the effect on production of the local monsoon season.

The second, more problematic answer, and one suggested by global tin association ITRI on its website, is that volumes have fallen because of the wide price differential between the ICDX and the LME. ******************************************************* Graphic on ICDX premium over LME cash: link.reuters.com/nun66v *******************************************************

In the first month after the launch of the ICDX contracts the price of its most liquid contract, tin with a minimum purity of 300ppm of lead, traded at rough parity with the LME cash price.

Since then, however, the Indonesian price has shifted to a persistently wide premium over the London price. As of the first two days of this week, that premium was around $700 per tonne. It was over $1,000 per tonne at times in January.

With the bulk of LME stocks located in Malaysia, have physical buyers in Asia simply been turning to the LME for cheaper material?

And if the premium remains in place, will LME sheds be steadily drained of their remaining stocks?

SHORTFALL AND SQUEEZE

The current tensions in the tin market are rooted in a structural supply-usage shortfall.

Indeed, the squeeze on LME units could have been worse still had it not been for the fact that China, the world's largest producer and user, sharply reduced its net call on tin from the international market last year.

Net imports fell to 11,300 tonnes, the lowest level since 2009. Exports came in at over 3,000 tonnes, the highest tally since 2007, the year before the introduction of a 10 percent export tax.

Even that figure may be an understatement. ITRI suggests that China's exports could have been around 5,000 tonnes based on import data from third countries.

China may be incentivised to lift exports further this year, but only if the LME price moves to a sufficient premium over the domestic price to counter the export duty.

One way that could happen, of course, is for a renewed flare-out in cash-date tightness on the LME, a development that is now starting to look not just possible but probable.

A TALE OF TWO EXCHANGES

The ICDX tin contracts have established themselves in super-fast time. And how could they not, given the Indonesian policy of forcing all exports through the exchange?

The international trading community is still reacting to the pace of change.

The requirement to trade exports through the ICDX was thrown into the mix at the last minute, a typical Indonesian surprise like the one sprung on its copper producers in January.

Which is why, presumably, the ICDX is turning on the charm campaign with its March conference.

International traders and buyers will no doubt attend. After all, the promise of "guaranteed supply" with "guaranteed quality" from the world's largest exporter is a powerful lure.

That the tin market will now be defined by two competing price-setting exchanges looks inevitable.

Does this evolution, however, come with a string attached in the form of "guaranteed" higher prices?

Right now, it's starting to look that way, at least as far as the LME contract is concerned. (editing by Jane Baird)

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