(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, March 3 (Reuters) - The flow of tin from Indonesia, the world’s largest exporter of the soldering metal, remains highly constrained.
Refined tin exports were just 3,152 tonnes in January and probably not much more than that in February, judging by the amount of metal trading on the Indonesia Commodity and Derivatives Exchange (ICDX) last month.
What is becoming increasingly clear, though, is that these reduced shipments are all about price as Indonesian producers use the country’s new tin export rules to attempt to impose a minimum tin price on the rest of the world.
Right now, it’s proving a successful strategy. But the history of such price support schemes is not a happy one and it remains to be seen whether this latest attempt will turn out any better.
Under new rules brought in last August, no refined tin is supposed to leave Indonesia if it hasn’t been traded on the ICDX. That means exchange trading volumes become a good proxy for actual shipments.
The only loophole in the law relates to tin solder, which is currently exempted, but possibly not for long, given a sharp jump in solder exports over the last couple of months.
Total ICDX tin volumes last month came in at 816 lots, or 4,080 tonnes, which should give a fair idea of what to expect in terms of February exports when the official figures come out in a few days’ time.
The historical norm for Indonesian tin exports has been fairly consistent at around 8,000 tonnes per month in recent years.
That means that since September exports have dropped by a cumulative 8,000-15,000 tonnes from “normal” levels, depending on whether you count solder or not.
Doesn’t sound like much but the global tin market is only a couple of hundred thousand tonnes in size and current inventory on the London Metal Exchange (LME) stands at a historically low 9,085 tonnes.
Indonesian shipments have often been volatile in the past, particularly at the start of any year when production levels can be affected by heavy rainfall.
But it is price rather than production that is currently determining export availability.
Tin sellers on the ICDX have initiated what they call a “suggested opening bid” (SOB).
Not a floor price, stressed Sutriono Edi, head of Indonesia’s Commodity and Future Trading Regulator Agency.
More “a suggestion, or advice, or a kind of guidance which is common in an auction system”.
Call it what you will, but the last two months have shown that when the LME price, or the international price, trades at too steep a discount to the Indonesian price, for which read the SOB price, selling dries up on the ICDX.
******************************************************* Graphic on tin prices and ICDX volumes: link.reuters.com/cuq37v *******************************************************
Volumes shrank to next to nothing over the tail end of January and the first half of February, when the price differential between the two exchanges was widest.
LME prices then rose strongly over the second half of February, partly in response to a tightening of the nearby market structure. That closed the gap with the Indonesian price and volumes suddenly kicked back into life.
To some extent this is not a new phenomenon.
Indonesian producers, particularly the smaller ones clustered on the islands of Bangka and Belitung, have tried to bully up prices in the past, normally by suspending shipments.
However, the SOB formalises this pricing influence and removes any doubt that what is happening in the tin market is not just about who sets the international price but at what level it is set.
Right now, Indonesia’s tin producers are getting their way. Note that it took the LME price to move up rather than the ICDX price to move down for the pricing gap to close.
That’s testament to the strangle-hold Indonesia currently exerts on global tin supply.
Producers just about everywhere else are working hard just to maintain historical output levels as older mines deplete.
And, as everyone in this market now knows, future supply looks equally challenged.
The commodity super cycle has come and largely gone, generating huge investment in deficit-prone markets such as copper and iron ore.
This spending surge has completely bypassed tin, partly because it is simply too small a market to make it onto most investors’ radar and partly because its usage profile in soldering and packaging is not the most exciting metals demand story out there.
This means that Indonesia, which has seen relatively stable production over the last few years, is an ever more important supplier to everyone else.
This places Indonesian producers in a uniquely powerful position to exert pricing influence over the ICDX and, it now seems, over international LME prices as well.
There are two problems, though; one short-term and one longer-term.
Firstly, unless there has really been a significant drop in actual output in Indonesia over the last few months, the country’s producers are sitting on growing stocks of the metal.
Discipline will be needed to prevent anyone breaking ranks and dumping too much metal into the market at the “wrong” price.
So far so good, judging by ICDX volumes, but discipline is not the obvious word to describe Indonesian tin producer behaviour in the past.
Secondly, assuming Indonesia can continue pulling the price of both ICDX and LME higher, the risk of unforeseen consequences rises.
The supply picture might, and probably will, change if the tin price starts with a “3” rather than a “2”.
China is the most obvious threat. The world’s largest producer has historically been a net importer but it turned exporter in a big way the last time the price punched up through the $30,000-per tonne level in 2011.
There are already signs that China is compensating for the reduced flow of Indonesian tin by sucking in raw materials from Myanmar. Imports totalled 89,100 tonnes last year and another 17,500 tonnes flowed across the border in January.
This is low-grade material not metal, but the point is that Myanmar wasn’t even on the list of world tin producers until this flow came to light early last year.
Indonesian producers should be careful what they wish for. Push the price too far and too fast and there may be more unexpected changes to the tin supply landscape.
Editing by William Hardy