LONDON (Reuters) - The new year has started with a bang for the tiny tin market.
London Metal Exchange (LME) three-month tin has just broken up through the $20,000 per tonne level for the first time since June last year.
At a current $20,180, the price is up 11 percent on its November low of $18,145 and has a new spring in its step after two years of consistent under-performance relative to the rest of the LME pack.
To understand tin’s sudden surge, look no further than LME stocks, which have fallen to record low levels.
LME time-spreads suggest there is no acute shortage of metal, at least for now, but two supply disruptions are combining to test medium-term availability.
There is also the possibility that tin is experiencing its first electric tingle emanating from the new technology revolution.
LME-registered stocks of tin have slumped from 3,045 tonnes at the beginning of December to a current 1,505 tonnes.
Both the headline figure and the 1,110 tonnes of open tonnage, excluding metal ear-marked for physical load-out, are at record lows.
The exchange has been living with depleted inventory levels for several years, which combined with low liquidity in the LME contract, has kept time-spreads consistently tight.
What is curious right now is that spreads are relatively relaxed. The benchmark cash-to-three-months period closed Wednesday valued at a cash premium of $30 per tonne.
In other metals this would signal cash-date tightness. By tin’s standards, however, it’s a benign level of backwardation. The cash-3s backwardation flexed as wide as $320 last year.
There is an unresolved contradiction between the current level of LME stocks and the lack of spreads tension.
Either stocks will soon rise or the spreads will soon tighten.
There would appear to be no shortage of metal away from the LME.
Stocks of tin registered with the Shanghai Futures Exchange (ShFE) are considerably higher at a current 7,970 tonnes.
Here too, though, appearances may be deceptive, albeit for different reasons.
The International Tin Association (ITA) argues that ShFE’s October launch of a warehouse warrant trading platform for tin has stimulated the transfer of off-market stocks to exchange warehouses.
This is partly due to an incentive scheme, rewarding sellers 60 yuan per tonne of tin sold through the platform, but it is also down to how the new system facilitates the use of tin as a financial instrument.
“Now, Chinese smelters seldom hold refined tin stocks except state-owned companies and Yunnan Chengfeng,” according to the ITA.
It’s noticeable that the ShFE tin contract bucked last year’s broader trend of falling interest in the Shanghai market with a 32 percent rise in volumes.
The key takeaway here is that neither LME nor ShFE stocks are quite what they seem. Those on the London market are probably understating and those in Shanghai probably overstating availability.
The ITA estimates that China destocked almost 10,000 tonnes of tin last year.
Refined metal production started falling sharply in the fourth quarter of 2018 as smelters partly or completely closed capacity due to raw material shortages.
China’s smelters, particularly those in the province of Yunnan, have become increasingly reliant on imports of tin concentrates from neighbouring Myanmar.
That flow of material, however, is slowing as the Wa mining area suffers from severe grade depletion.
The ITA estimates imports fell around 11 percent to 49,800 tonnes of contained metal in January-November 2018 from 55,900 tonnes in the same period of 2017. Last year’s flows would have been smaller still but for the shipment of around 4,000 tonnes from accumulated stocks in Myanmar.
Signs of supply stress in China are coinciding with more tangible problems in the world’s biggest exporter, Indonesia.
Exports slumped 56 percent year-on-year in November to 3,494 tonnes, the lowest monthly total since July 2016.
It was the second month of sharp decline following a police investigation into PT Surveyor Indonesia, one of the companies that ensures tin exports comply with the country’s strict regulations covering metal produced by a historically free-wheeling unofficial production sector.
Such regulatory hits on Indonesian exports were commonplace a few years ago but have since become increasingly rare.
History suggests the latest export spasm in Indonesia will be short-lived with shipments rising again once the current inspection scandal is resolved.
The problem of declining production in Myanmar may prove to be a longer-lasting supply disruptor with the ITA warning the raw materials crunch in China could worsen in the first part of this year before domestic supply picks up the slack.
Right now, the supply chain is being tested with a draw on off-market stocks both in China and the rest of the world.
That in large part explains why tin has woken from its previous torpor to make its early-year move on the upside.
There is also the possibility that this market is experiencing its first electric tingle.
The new technology revolution, first and foremost in the electric vehicle race, has inflamed other metals such as cobalt and nickel.
Tin wasn’t on investors’ radar until a piece of research by the Massachusetts Institute of Technology (MIT) commissioned by Rio Tinto.
The surprising finding was that relative to size of market tin will experience the greatest impact of any metal from electric vehicles, renewable energy and the internet of things.
This is because tin will literally, in the form of soldering, be the material that glues the technology revolution together.
It’s going to be a slow burn story. Much of MIT’s forecast is based on what happens beyond the immediate electric vehicle impulse, implying a more gradual usage boost than that to those metals used directly in lithium-ion batteries.
But there is a sense that tin has just crept onto the electric bull narrative radar.
In the interim, however, immediate prospects are still beholden to what happens next with LME inventory.
LME time-spreads are signalling there is no acute shortage of metal. We’re about to find out if that’s true.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by David Evans
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