By Andy Home/ London
Tin is the underperformer of an underperforming base metals pack on the London Metal Exchange (LME). At a current $16,640 per tonne, LME three-month tin is down more than 14% on the start of the year. LME inventory has rebuilt rapidly from just 740 tonnes in early May to a current 6,550 tonnes. The squeeze that sucked all that metal into the LME system has now abated. LME tin time-spreads moved into contango at the end of September and have stayed there since.
That in itself marks a significant turnaround for a contract prone to embedded tightness in recent years.
Market structure and sentiment in London indicate a subdued, if not outright bearish, outlook.
Not so the Shanghai tin market, which has been noticeably outperforming London since the middle of September. The most active contract is now down just 7% on the start of January.
This is a role reversal for the two markets. Shanghai was weaker in the first part of the year and was the venue for the bear raid in July that sent LME tin tumbling to three-year lows.
But sentiment in China has shifted dramatically as the domestic supply chain tightens. The country flipped to being a net importer of refined tin in September for the first time since December 2018, with the International Tin Association (ITA) expecting it to remain a net importer for the rest of the year.
Chinese production of refined tin has been falling this year, with Shanghai Metal Market estimating a 6% contraction and the ITA a heavier 9% slump.
The core problem for China’s smelters has been a shortage of raw materials, partly due to low domestic output and partly due to declining tin concentrate supplies from Myanmar, where mines are rapidly depleting.
Imports of concentrate, just about all of which come from China’s southwestern neighbour, fell by 21% in the first nine months of this year, extending a slide that has been running since the start of 2017.
A group of Chinese smelters announced in September their intent to cut production by a collective 20,000 tonnes.
The message had its intended effect, triggering a short-covering rally in London and Shanghai markets.
As ever with such statements by Chinese producer groups, it came with a nice big round number but a conspicuous lack of detail. However, the collective cry of pain was audible and recent events suggest the raw materials squeeze will get worse before it gets better.
A fatal accident on October 28 at a tin mine near the city of Hechi in Guangxi province has triggered an emergency response by the local authorities, with all local tin mines ordered to cease production and undergo safety inspections.
This, according to the ITA, which reported the incident, will hit Guangxi China Tin, one of the country’s largest tin miners with production last year of 15,000 tonnes. Just about all of its output came from mines near Hechi.
An already tight raw materials market is going to get tighter, constraining further refined tin production over the coming months. Which is probably why the Shanghai price has been outperforming its London peer in recent weeks.
Moreover, while LME stocks have been holding consistently above the 6,000-tonne level for the first time since 2016, those registered with the Shanghai Futures Exchange have been steadily draining away.
Deliverable stocks have fallen from more than 8,000 tonnes in June to a current 4,413 tonnes, the lowest since April 2018. Further evidence of a tightening local market comes from China’s refined tin trade with the rest of the world.
The country has steadily lifted exports since the removal of an export tax at the start of 2017. It was a net exporter in 2018 for the first time since 2007.
Export flows accelerated again in the first half of 2019, when outbound shipments almost doubled year-on-year in response to the high cash premium on offer for delivery to one of the LME’s warehousing hubs. However, exports almost completely dried up over the third quarter to the point that China was a net importer to the tune of 180 tonnes in September.
It’s a marginal figure but you’d have to go back to December 2017 to find a higher one. This evolving supply-side story has evidently moved tin on to the speculative radar in Shanghai with market open interest running at elevated levels since the middle of the year. The local market narrative is bullish.
Li Ziyan, senior tin analyst at Shanghai Metal Market, forecasts prices to rise above 140,000 yuan per tonne ($20,000 per tonne) by the end of the year.
The ITA is more cautious in its outlook, saying the London market will struggle to generate a sustained move higher in the short term because of relatively high stocks and a still subdued demand outlook.
n Andy Home is a columnist for Reuters. The views expressed are those of the author.
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