(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, Jan 18 (Reuters) - The London tin market remains a tight and crowded space.
True, stocks of the soldering metal registered with the London Metal Exchange (LME) have rebuilt from November’s low of 2,895 tonnes to a current 4,160 tonnes.
And true, the tightness in the nearby spread structure appears to have correspondingly eased to the point that the benchmark cash-to-three-months period CMSN0-3 actually flipped into small contango last week for the first time since September.
But stocks are still low by any historical standard and spreads are still stressed, that cash-to-3s period ending Tuesday valued at $10 per tonne backwardation.
The underlying problem seems to be a lack of deliverable metal, even with the persistent cash incentive presented by the backwardation, which flexed out as wide as $270 per tonne last month.
There is tin in China. That much is clear from the 3,846 tonnes registered with the Shanghai Futures Exchange (ShFE).
But it is trapped in China behind that country’s 10-percent export duty.
Or it was.
China may just have quietly removed that barrier and if it has done, it would have major ramifications for global tin flows and the metal-starved London market.
Graphic on LME tin stocks and spreads:
Emphasis on the word “may” in that last sentence.
There is still a good deal of uncertainty as to what exactly may, or may not, have happened.
But tin industry body ITRI has drawn attention to the fact that the tin export duty has not been referenced in China’s 2017 Exports Commodities Tax Rates table.
“ITRI China has contacted a number of companies, including brokers, producers and other experts, in an attempt to verify the cancellation of the duty,” it said in a post on its website.
“Whilst most believe it has been scrapped, no one has been able to verify this with 100-percent certainty because of the absence of any official announcement or documentation. ITRI’s view is that the duty has been cancelled, but we suspect the situation may not become any clearer until after China’s Spring Festival.”
Why would China have dropped the duty, which has been in place since the start of 2008?
Well, quite possibly in reaction to a formal complaint lodged last July by the U.S. to the World Trade Organization (WTO) about China’s export duties on a number of minerals and metals, including refined tin.
The WTO complaints process is a slow-burn affair, providing for a period of mutual talks before moving on to a dispute-settlement panel but China has in the past shown itself prepared to take unilateral action before things get so far.
It might just have done so again.
Graphic on China’s trade in refined tin:
If it has done, the impact on the global flow of refined tin will be significant.
Those chronically low LME stocks speak to a steady tightening of availability outside of China.
The driver has been the steady and continuing decline in exports from Indonesia, the world’s second-largest producer but its largest exporting nation.
Indonesian exports fell by 9.4 percent to 63,560 tonnes last year. It was the fourth consecutive annual fall in the country’s supply.
This in part reflects the Indonesian government’s increasingly assertive grip on its previously chaotic tin mining and refining sector. But it is also down to a long-term decline in tin grades as the country’s easily accessible reserves are gradually exhausted.
Chinese production seemed set to follow a similar path, again on the back of depleting mine reserves, until the emergence of Myanmar as a major new supplier a couple of years ago.
It has been pumping raw material over the border to China at a rate of over 50,000 tonnes per year contained metal, underpinning China’s position as the world’s top refined tin producing country.
But not the top exporting country.
Since the imposition of the export tax in 2008 China’s exports have withered away.
Refined tin exports totalled 23,600 tonnes in 2007. In 2015 the tally was a negligible 562 tonnes and in the first 11 months of last year just 730 tonnes.
More tin leaves the country in the form of tin product, which is not subject to the export tariff. There were 4,500 tonnes of such exports in the January-November 2016 period. But such material is not deliverable against the LME.
If the export duty has gone, this dynamic of a well-supplied, probably over-supplied, Chinese market and an undersupplied non-Chinese market is going to change.
That would be good news for the London tin market, which has been starved of stocks liquidity for over a year.
Not only has that generated volatility in the time-spreads but it has quite possibly been a factor, together with subdued broader metals markets and LME fee hikes, in the fall-off in volumes in the LME tin contract.
LME tin trading totalled 1.36 million lots, or 6.8 million tonnes last year, down 7.4 percent on 2015 and down almost 36 percent since 2014.
While tin trading in London has reduced, that in Shanghai has boomed. The ShFE launched its tin contract in March 2015 but volumes have steadily increased to the point that it traded 6.3 million tonnes last year.
There are key differences between the two markets with the LME still the place to go for industrial hedgers and the ShFE more dependent on the whims of Chinese speculators.
But arbitrage between the two is only going to increase if the duty has gone.
That may yet prove to be a double-edged sword for the LME, though, given the way that the Chinese rollercoaster has increasingly influenced price formation in other commodity markets.
As ITRI itself comments: “We expect the removal of this (export duty) barrier to trade will have global significance”.
Quite so. Now the only thing we all need is some sort of confirmation.
Editing by Susan Thomas