July 9, 2014 / 3:26 PM / 4 years ago

Hidden Chinese tin stocks, weak demand head off expected deficit

* LME tin stocks up almost 50 pct since late February

* Investors had expected deficit to boost prices

* Unexpected Chinese exports likely behind plentiful supply

* Graphic of tin stocks: link.reuters.com/byd38s

By Eric Onstad

LONDON, July 9 (Reuters) - The export of hidden Chinese tin stocks is likely to be behind a puzzling rise in London Metal Exchange (LME) inventories that has frustrated investors who expected to see shortages this year.

At the start of the year, tight supply-demand fundamentals led to numerous forecasts that tin prices would rise.

But prices are down half a percent so far this year and have shed nearly 7 percent since touching a peak in April, weighed down partly by rising inventories.

Full data are not available, but analysts say that the apparently well supplied market is due to hidden stocks in China that are making their way onto the international market, while demand has been weaker than forecast.

Analysts polled by Reuters in April expected the cash LME tin price to average $23,360 a tonne this year, compared with the current price of $22,200.

But instead of a scarcity of tin, stocks in warehouses monitored by the LME MSNSTX-TOTAL have surged by nearly 50 percent since Feb. 27, confounding investors and analysts.

“It’s wrong-footed a lot of people including ourselves,” analyst Robin Bhar at Societe Generale in London said. “The price action has been very disappointing.”

Peter Kettle, manager of markets at industry group ITRI, agreed that supply appeared to be greater than anticipated: “The consensus view was that there’s a deficit this year, but no one can actually see it in real life.”


Meanwhile, investors have been attracted to forecasts of shortages in nickel and zinc and piled into those markets, sucking even more liquidity from tin, which was already the LME base metal with the least volume.

Volumes on the LME’s electronic trading platform are down 13.5 percent so far this year on last year’s average, analyst Leon Westgate at Standard Bank said.

“It seems that market attention has switched to metals like nickel and to a lesser extent zinc, with tin seen as too illiquid to build a decent-sized position,” he said in a note.

The rise in inventories has been particularly baffling because top tin exporter Indonesia imposed rules last year forcing all tin ingot shipments to trade via a local platform before leaving the country, resulting in a 21 percent fall in exports during the first five months of the year.

“If Indonesia is not even exporting all that it is supposed to be producing, that makes the deficit even bigger, and yet that clearly is not showing up in price performance or the trend in LME stocks,” analyst Stephen Briggs at BNP Paribas said.

“That is a bit of a mystery to me.”


Analysts say that more material has been available on global markets partly due to unexpected exports from China.

Hard data from China has not been released, but Kettle estimated that China exported around 5,000 tonnes of tin in the first five months of the year, an increase of about 50 percent from the same period last year.

In 2012, large amounts of tin were imported by China due to an attractive arbitrage between the LME and Chinese domestic prices, leading to a build-up of an estimated 20,000 tonnes of hidden stocks, ITRI’s Kettle said.

That price relationship has reversed, however, leading to an outflow of material from China, which imposes a tax on refined metal but not on products.

“Over the past several months, this was the first time where the price differential has reversed, and as long as you don’t have to pay export duty, it’s been profitable to export again,” Kettle said.

Briggs said: “We have seen in the past that when material comes out, it tends to be categorised as tin product by China, but is often categorised by the importing country as just refined tin.”

Weaker demand than expected is also probably behind the rise in inventories in tin, which is mainly used as solder in electronics, analysts said.

“There was a pretty good pick-up (in demand) globally in the second half of last year, but it seems to have levelled out now,” Kettle said. “Chinese demand has been fairly flat, with much slower growth in electronics production in the first half of the year.”

Some analysts still expect shortages to eventually develop in tin. “Tin is only a couple of bullish stories away from being re-ignited, with the ingredients in place for a strong rally when it is. For the moment, however, the metal is moribund,” Westgate said. (editing by Jane Baird)

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