LONDON (Reuters) - Industrial metals are caught in a bear vortex of slowing demand growth, first and foremost in China, and oversupply, as producers pay the price for the exuberance of the boom years.
If prices are to recover from their current bombed-out levels, everyone agrees more production will have to be taken off line, whether through voluntary restraint or forcible cash-burn attrition.
Glencore’s well-flagged cuts to its copper, zinc and lead production portfolio have at least halted the price declines in those markets, although they have not reversed long-running downtrends.
Significant cuts in either aluminum or nickel supply remain conspicuous by their absence, which is one reason both metals are particularly out of favor even in the context of the general doom and gloom pervading the complex.
And then there is tin.
Often the contrarian of the metals traded on the London Metal Exchange (LME), tin is once again defying the broader bear narrative.
If there’s a problem with supply in the tin market, it is that there’s not enough of it right now.
Visible stocks are low by just about any historic yardstick. Those registered with the LME total just 5,010 tonnes, of which 540 tonnes are earmarked for physical load-out.
Moreover, exchange stocks have remained low despite a persistent premium for cash metal, which might reasonably have been expected to incentivize the delivery of more metal into LME sheds.
The LME’s benchmark cash-to-three-months spread traded out to $510 backwardation at one stage in August, the tightest the period’s been since 2009. It’s still tight, valued at $67 backwardation as of Tuesday’s close.
So how come tin is not overstocked and oversupplied like just about every other industrial metal? And is it a temporary problem or something more structural?
As ever with this small market, supply and availability is largely a function of two key countries, one highly visible, one bathed in statistical shadow.
Indonesia, the world’s largest exporter of the soldering metal, is going through one of its periodic shipment spasms.
And although some of the country’s smaller producers will undoubtedly be struggling to remain in operation at current price levels, this, as ever with Indonesia, is more about government policy.
The authorities have been waging a long-running campaign to try and control the free-wheeling tin miners and smelters clustered on the islands of Bangka and Belitung.
Export rules have been steadily tightened to prevent smuggling and now the authorities are targeting illegal mines with a requirement that exporters hold “clean and clear” certification, proving the metal has come from government-registered operations.
Delays in processing such applications meant no tin exports at all in August and although shipments resumed in September, there is considerable doubt as to whether many smaller operators can meet the new government requirements.
Cumulative exports fell by 10 percent to 52,079 tonnes in the first nine months of this year, which is shaping up to be the third consecutive year of falling shipments.
China is the world’s largest producer and user of tin. It is a net importer of refined metal.
Well, it is, if you believe the official customs figures, which show imports running at 7,400 tonnes and exports at just 65 tonnes in the first nine months of 2015.
The problem is that official appearances can be misleading. Tin industry body ITRI, for example, calculates that receipts of refined tin from China by importing countries amounted to over 2,200 tonnes “based on incomplete data up to August”.
Such shadow exports from China have been sleuthed down by ITRI in the past and have often confounded analysts’ price-positive supply-demand expectations.
Right now, though, they have stopped, ITRI citing a customs department investigation into local operators suspected of bypassing China’s 10 percent export tax.
“Some of the owners have been arrested,” according to ITRI, and “local sources reported that no-one would like to take the risk to export tin” in whatever form.
This clampdown on unofficial Chinese exports has coincided with the more visible interruption to shipments from Indonesia, draining the international market of units.
Such are the short-term constraints on tin availability.
But there is an underlying story of structural supply challenges. Simply put, the supercycle largely passed tiny tin by in terms of investment in new mines.
Production from older mines in countries such as Peru and Brazil, meanwhile, is steadily falling, as it has been for some time.
Indeed, the only reason tin has avoided a more serious supply crunch is the emergence of a totally new producing country in the form of Myanmar.
It burst onto the radar in 2013 as a major supplier of raw materials to Chinese smelters. China’s imports from Myanmar grew from virtually zero in 2012 to 89,000 tonnes (bulk weight, not metal contained) in 2013 and further to 173,000 tonnes in 2014.
This year’s imports are up again at 178,000 tonnes in the first nine months alone.
But, according to ITRI, local operators are having to work ever harder to maintain such output levels. Actual production may have been declining this year but “the considerable expansion of processing capacity” has allowed the “treatment of previously stockpiled or discarded low-grade ore.”
ITRI forecasts Myanmar to produce around 38,000 tonnes of contained tin this year and “a further small increase may be possible next year”.
Note the conditionality in that forecast.
The sustainability of production in Myanmar is a known unknown in the tin market. It may be close to a peak. It may, indeed, have already peaked.
If it has, tin’s structural supply problems will come back to bite the market, even allowing for the same Chinese demand headwinds that are hitting every industrial commodity.
In a metallic landscape where supply is the differentiator, tin’s prospects don’t look nearly as dire as markets such as nickel, where producers have seriously mistimed the new wave of production capacity.
Within the current broader narrative of too much supply and too much inventory, tin has neither, hence that persistent backwardation on the LME.
Indeed, the supply strain may get worse.
After all, if new mines weren’t incentivized at prices above $20,000 per tonne, they are certainly not going to be so at current prices trading around $15,000 per tonne.
(The opinions expressed here are those of the author, a columnist for Reuters.)
Editing by David Evans