7 Min Read
(The opinions expressed here are those of the author, a columnist for Reuters)
By Andy Home
LONDON, Nov 30 (Reuters) - Tin has been largely immune from the speculative froth whipping across the rest of the industrial metals complex.
Yet the soldering metal remains the second-best performer among the core base metals traded on the London Metal Exchange (LME), its 45 percent year-to-date gain eclipsed only by zinc, which has seen prices rise almost 73 percent.
This is because even prior to this month's China-fuelled commodities rally, the tin price was already reflecting structural supply-side stresses.
LME stocks remain chronically low and time-spreads chronically tight.
There is a sense this market is finally starting to buckle from the combination of declining production in Indonesia, the world's biggest tin exporter, and years of underinvestment in new mine capacity.
It would have happened sooner were it not for a massive and largely unforeseen production surge in Myanmar, which has become a major supplier of raw materials to Chinese smelters over the last few years.
The Man Maw mining district on the border with China has plugged the supply gaps elsewhere in the world.
The sustainability of the Myanmar mines was already a key concern for the tin sector.
Such concerns will be heightened after a Reuters report highlighting the potential for tin products sourced from the country to fall foul of U.S. sanctions.
Graphic on LME tin stocks and spreads:
The London tin market is experiencing sustained tightness due to low stocks.
The benchmark cash-to-three-months spread has been trading in persistent backwardation since the middle of September.
As of Tuesday's close, cash tin was commanding a premium of $205 per tonne over that for three-month delivery.
The LME's latest market positioning report <0#LME-WHL> shows a dominant long holding between 40 and 50 percent of available stocks. The previous report showed two holding up to 90 percent.
That, however, says more about the level of available stocks than it does about the size of those positions.
Total stocks stand at 3,105 tonnes. Strip out the metal earmarked for physical load-out from the LME warehouse system, however, and what is available for the settlement of positions stands at just 1,800 tonnes.
This is not the first time that tiny tin, one of the less active contracts traded on the LME, has seen the front part of the curve squeezed.
Indeed, it's been an increasingly regular phenomenon since the middle of 2015, again reflecting low stocks liquidity.
What stands out this time around is how little metal has been drawn into the system by the premium to deliver to the LME.
Since the start of September, when the front part of the curve started contracting, only 950 tonnes of tin have been warranted in the LME system.
Over the course of a similar squeeze in August and September last year, over 3,100 tonnes were delivered into LME warehouses.
Physical availability is being tested and so far at least has been found wanting.
The most obvious reason is the continuing slide in shipments from Indonesia, the world's largest tin exporter.
Exports have been declining since 2012 and they were down by another 15 percent over the first 10 months of this year.
The less obvious reason is the resulting depletion of the tin industry's own working stocks.
The Tin producers association ITRI, for example, estimates that pipeline stocks held by users have fallen by around a third, or more than 10,000 tonnes, to 21,000 tonnes over the last five years.
There is tin in China, both the world's largest producer and user of the metal.
As of last Friday there were 1,907 tonnes sitting in warehouses registered with the Shanghai Futures Exchange (ShFE).
There is probably significantly more lying in statistical darkness beyond the ShFE system.
But it is effectively trapped in China by the country's 10 percent export duty. Indeed, the country has tended to be a net importer of refined tin, whilst being an exporter of tin products.
China's call on refined tin from the rest of the world has diminished significantly over the last few years, net imports sliding from more than 20,000 tonnes in 2011-2012 to under 10,000 tonnes last year. Net imports this year are on course to fall again.
This has alleviated the supply pressure in the rest of the world.
And it is down to China's ability to offset its own mine production challenges with imports of tin ore from neighbouring Myanmar. These have ballooned since 2013, when the Man Maw mining district first started cranking up tin production.
It's still in full swing, evidenced by the continued flow of material across the border, up 83 percent at 384,000 tonnes (bulk weight) in the first 10 months of this year.
How sustainable is the current level of production in Myanmar is one of the great unknowns in the tin market. ITRI's view is that production may already have peaked as the easily-accessible reserves are mined out.
Now there are sustainability questions of a different kind.
Most tin market participants were aware that the Man Maw mines operate in part of Myanmar controlled by the United Wa State Army (UWSA), which has carved out a semi-autonomous state within a state.
Less well known is the fact that the United States has sanctions in place against the UWSA since 2003 due to alleged drug trafficking.
That raises all sorts of uncomfortable questions for U.S. end-users such as Apple, General Electric and Starbucks, who source their tin products from China, particularly if those products use metal from Yunnan Tin, which has been the main buyer of Myanmar ore.
In practice, it's unlikely to lead to immediate enforcement action by the U.S. authorities given how embedded Myanmar tin is in the global supply chain.
A user of, say, Chinese tin solder is unlikely to be punished for not knowing that its supplier was sourcing its refined tin from Yunnan, which in turn was blending locally-mined ore with that from Myanmar.
It's not as if the Wa State is classified as a conflict zone in the same way as the Democratic Republic of Congo, where bodies such as ITRI have pioneered the tracking of minerals such as tin to ensure that what comes out does not originate from mines controlled by armed insurgents.
That said, however, now that the Myanmar ore has been tracked down the full length of the tin supply chain, it's probably only a matter of time before a company such as Apple looks for another source of tin.
The only problem is that it's going to struggle to find one.
The LME backwardation should be acting as a magnet to attract metal to rebuild depleted stocks. It's starting to look as if there is very little metal to be attracted.
Editing by David Evans