(The opinions expressed here are those of the author, a columnist for Reuters.)
* LME tin stocks and spreads: tmsnrt.rs/2BV0AKN
* Indonesian exports: tmsnrt.rs/2BYk2GJ
* China's tin imports: tmsnrt.rs/2solcXU
By Andy Home
LONDON, Feb 13 (Reuters) - You might think the tin market is on a bull charge.
Three-month tin on the London Metal Exchange (LME) recorded a high of $22,000 per tonne on Jan. 29, a level last seen in November 2016.
The soldering metal has since retreated to $21,430 but is still the strongest year-to-date performer among the LME base metals pack, with gains of almost 7 percent.
LME stocks are very low (again) and time-spreads are very tight (again).
Appearances, however, are deceptive in this particular market.
Viewed through a wider lens, tin has actually been a chronic underperformer since the start of 2017 with a net gain of just 2 percent. Lead, the next “weakest” LME performer over the same timeframe, is up 25 percent.
And those signs of supply stress say as much about the London contract as they do about the broader market.
Indeed, tin supply surprised on the upside last year, production from the world’s top 10 producers rising 5 percent, according to the International Tin Association (ITA).
Unless that rate of growth starts slowing, tin is going to struggle to close the pricing gap with the rest of the LME complex.
Graphic on LME tin stocks and spreads:
Since the start of January, LME tin stocks have fallen by 310 tonnes, or 14 percent. They stand at 1,925 tonnes, equivalent to a minimal two days of global usage.
The benchmark cash-to-three-months spread CMSN0-3 closed Monday valued at a backwardation of $95 per tonne after the premium for cash metal flexed out as wide as $260 late January.
Both indicators are normally a sure sign of extreme scarcity but when it comes to the LME tin contract, they are more the new normal.
Stocks were last above 5,000 tonnes almost a year ago, while the front part of the forward curve has been in continuous backwardation since April 2017.
Rather than denote physical market stress, low stocks and tight spreads are a manifestation of low liquidity.
Volumes on the LME tin contract have contracted for three straight years, falling another 11 percent in 2017 even as total exchange volumes grew by almost 1 percent.
Dominant position holders, of which there are two right now <0#LME-WHC>, have to navigate the liquidity gaps that regularly open up between producer and fund position flows.
The resulting distortions bend any interpretative light emanating from the London market.
It’s worth bearing in mind that there is twice as much physical tin, 5,018 tonnes of it, sitting in warehouses registered with the Shanghai Futures Exchange (ShFE) in China.
Open interest on the ShFE tin contract, launched only in 2015, more than doubled last year.
In terms of exchange trading, tin is now a tale of two cities, not one.
Graphic on Indonesian tin exports:
Graphic on China’s tin imports:
Tin availability on the LME might be tight but last year was actually one of feast, not famine, in the broader physical market.
The combined output of the top 10 refined tin producers grew by 5.4 percent to 229,800 tonnes last year, according to the ITA, the new moniker for the association formerly known as ITRI.
The biggest year-on-year increases were registered by Indonesia’s PT Timah, up 27 percent, and China’s Yunnan Chengfeng, up 33 percent.
Indonesia is the world’s largest exporter of tin, while China is the largest producer and user, meaning these two countries are key to understanding the current state of supply.
Both surprised last year.
Indonesian exports, as registered by the country’s trade ministry, jumped by 23 percent to 78,190 tonnes.
It was the first year-on-year increase since 2012, reflecting a period of relative stability after years of disruption, most of it down to a long government campaign to exert control over independent operators.
While Indonesian exports grew again in 2017, China’s imports collapsed.
Inbound shipments of refined tin totalled 3,960 tonnes, down from 10,100 tonnes in 2016 and the lowest annual total since at least 2003.
Factoring in a jump in exports, mostly to Hong Kong, China’s net draw on the rest of the world was just 1,780 tonnes, the lowest level since 2007.
China’s new tendency towards self-sufficiency at the refined metal stage of the supply chain is a consequence of its growing reliance on neighbouring Myanmar for supplies of raw materials.
Myanmar emerged as a major tin producer only a couple of years ago and its largely unexpected entry onto the world stage upended a narrative of chronic shortfall.
At a headline level, China’s imports of mined concentrates from Myanmar fell 38 percent last year.
But that bulk figure masks a steady improvement in the grade of material that is now crossing the border.
The ITA, for example, estimates that in terms of contained metal imports from Myanmar actually rose 12 percent to 67,500 tonnes in 2017.
Raw materials abundance has allowed Chinese producers such as Yunnan Chengfeng to lift output and China collectively almost to turn off the refined metal import tap.
Pending some totally unexpected change in supply dynamics, tin’s fortunes this year will remain beholden to Indonesia and Myanmar.
Bulls might take heart from a sharp drop in Indonesia’s January exports but month-on-month volatility can often generate statistical outliers in this data series.
Meanwhile, PT Timah, the country’s dominant official producer, is targeting a substantial 18 percent hike in production to around 36,700 tonnes in 2018.
Myanmar production is expected to decline, although that statement comes with the heavy caveat that it was supposed to fall last year but didn’t.
Mechanisation, stripping of older tailings and the release of stocks may have offset a slide in core grades in the country’s tin mining region, according to the ITA.
“The high level of shipments from Myanmar reported in 2017 will be difficult to sustain in 2018 unless new ore deposits are discovered locally,” the association notes.
“Local miners, as well as Chinese traders, investors and smelters, are consistent in the belief that shipments will decline in 2018.”
The ITA is forecasting Myanmar production to fall to 54,000 tonnes this year but warns it’s an assessment that is “subject to a wide margin of error”.
The country remains the key “known unknown” in terms of global tin supply.
What is increasingly a “known known”, however, is that the LME tin contract offers a shrinking prism through which to see that global supply chain. (Editing by Dale Hudson)
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.