8 Min Read
* Tin trade rule seen as template for palm oil, coal, gold
* Powerful Widjaja clan behind ICDX physical tin contract
* Tin laws backed by trade minister with an eye on presidency
By Melanie Burton and Michael Taylor
PANGKALPINANG, Indonesia/SINGAPORE, Dec 30 (Reuters) - I ndonesia's bold attempt to challenge the London Metal Exchange (LME) for supremacy in the global tin market by imposing strict export rules and driving up prices looks to be paying off.
Shipments from the world's biggest tin exporter slumped to below 1,000 tonnes in September from over 6,000 tonnes after Jakarta ruled at the end of August that all tin ingot shipments should trade via a local platform, the Indonesia Commodity and Derivatives Exchange (ICDX), before being exported.
By November, shipments had recovered to August levels, but tin prices have risen more than 8 percent to $23,000 a tonne since the end-August policy move.
"By imposing the new tin trade rules we have set a price target at $25,000-$29,000 a tonne this year," Sutriono Edi, head of Indonesia's Commodity Futures Trading Regulatory Agency, told Reuters. "It's better for us to export less volume but for higher value and better prices, than export a bigger volume but with low value and low prices."
The stricter trading rules, and subsequent drop in exports, spooked suppliers to some of the world's biggest electronics companies, including Apple Inc and Samsung Electronics . Neither company responded to emailed requests for comment. Indonesia controls 40 percent of internationally traded tin and, outside China, supplies up to two-thirds of Asia's electronics industry with a material used in circuit boards that go into smartphones and tablets.
Indonesia hopes the new rules will also deter illegal tin mining and set a blueprint for other commodities where the country is the world's biggest exporter, such as palm oil, thermal coal and nickel ore, industry and government sources said. It is also home to the mine which holds the world's biggest gold reserves.
"We have the chance to be a price setter for tin," said Trade Minister Gita Wirjawan, a former Goldman Sachs banker who has presidential aspirations. "If the ICDX succeeds in keeping prices up, we can make it the basis for other commodities."
While tin contributes less than 1 percent of Southeast Asia's biggest economy's GDP, it is a test case for a government keen to flex its muscles in global commodity markets.
The new rule slashed trade between buyers and sellers who cannot directly agree term deals for 2014. Traders stepped in to fill the gap, but Indonesia's supply, now under government control, has left some traders uneasy.
"There are a lot of customers trying other sources," said one physical tin trader whose company has signed up to the ICDX. "Maybe what Indonesia wants to see is they strangle the market a bit, then LME stocks start running down and the price goes up."
Several top-tier LME members, including JPMorgan Chase are showing interest in joining the ICDX, metals traders said, in a sign the new contract is gaining traction and could be a serious challenger to the LME, which owns the 136-year-old metals contract that is the global benchmark. JPMorgan did not respond to a request for comment.
Launched early last year, liquidity in the ICDX tin contract had ground to a halt until a relaunch of several contracts and the new government regulation gave it new life from August.
"The ICDX has established itself as the only credible source of supply for Indonesia's physical market - it's quite an achievement," said one London-based trader. "If there's no chaos on the supply side, I should have more confidence next year that I should get the tonnage supplied as promised."
Some people in the tin industry said there was a risk that the LME, now owned by the Hong Kong Exchange and Clearing Ltd , could become complacent. "The new owners ... are not paying attention to the risks to the current contracts," said one senior metals industry source. "If (ICDX) can get enough physical prices based on their new reference, that could give it an opportunity to launch a product to rival LME pricing."
A spokeswoman for the LME declined to comment.
Indonesian officials say the new laws should prolong the life of the country's depleting tin reserves through sustainable mining. Critics counter that it's more about restricting supply to a narrow channel and raising prices to benefit vested business interests - a charge government ministers deny.
The ICDX was founded by 11 palm oil and gold producers in 2010, and is headed by Megain Widjaja, the grandson of Eka Tjipta Widjaja, one of Indonesia's wealthiest oligarchs.
The family's conglomerate, Sinar Mas Group, has investments in palm oil, pulp and paper, banking, property and telecoms, and Forbes estimates the family is worth $7 billion. The group, which has no other tin interests, is one of six owners of the ICDX via PT Sinarmas Futures, according to a list the exchange provided to Reuters. The list names PT Swarna Abadi Perkasa, PT Interlink Data Services, PT Karya Duta Perkasa, PT Inti Kencana Mas and PT Logam Mulia Pratama as the other five shareholders.
"It's not true when critics say the regulation is only benefitting certain business people," said Trade Minister Wirjawan. "The regulation benefits every exporter and is fair and equal to everybody."
Earlier this year, Indonesia set purity rules on the amount of lead in tin and from next month will ban all unrefined metal exports. Tin smelters that can't meet the new purity rules are unable to export and, instead, have to feed larger smelters, upgrade their facilities, or not survive.
The sharp drop in Indonesian exports rippled through supply chains in the region, with smelters in Malaysia and Thailand reliant on Indonesian tin. Global electronics giants are also vulnerable to supply disruptions from Indonesia.
In Japan, which imports about 80 percent of its tin from Indonesia, some trading firms have boosted inventories until this month, but may then have to turn to LME warehouses. Stockpiles tracked by the LME dropped to 10,005 tonnes this week, almost a third below the levels before the new rule took effect at the end of August.
"For somewhere like Japan or Korea, Indonesia is absolutely critical and there's just not enough tin around from other sources to replace it," Peter Kettle at global industry group ITRI told Reuters in October.
Indonesia, though, has a track record of watering down, or even reversing, populist measures, fuelling expectations that the authorities may yet prove not quite so tough.
In July, for example, the tin purity law was softened to allow higher lead content after an industry backlash. And policymakers are scrambling to ease overtly nationalistic resource rules, including a pending ban on mineral ore exports, and a royalty hike and export tax on coal.
"What happens in the short term, and what happens after the Indonesian election is another question," said a tin trader at a Western bank, who is not authorised to talk to the media.
"For the short term, everyone has to play along because you have to get the material. "But for the long term, no one knows - it's Indonesia."