Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

There's a player out there who's controlling the tin market, with more than half of cash and next-day positions in the thinly traded metal. If you believe they're about to make their fortune, think again.

The theory of market corners hasn't changed much since the Book of Genesis. The patriarch Joseph interpreted a dream of the Egyptian pharaoh to predict the country would see seven years of bounteous crops, followed by seven years of famine. The pharaoh used the former to build a huge inventory of grain, and then became even richer selling it to his subjects when hunger started to bite.

Expensive Exercise
The tom-next spread, a measure of how much it costs to borrow tin for one day, jumped to as high as $40 a ton Tuesday
Source: LME

That's not so different to what the Hunt brothers tried to do with the global silver market in the late 1970s. After cornering as much as half of deliverable silver stocks, they briefly became among the world's richest men when the price of the precious metal rose fivefold in late 1979 and early 1980. It didn't end well: U.S. regulators restricted credit to metal speculators and both siblings ended up declaring bankruptcy.

Similar attempts to accumulate outsize commodities positions brought ruin to the whales in the tin market in the early 1980s, and to Thailand's former prime minister Yingluck Shinawatra, who was removed in a 2014 coup after her government used a subsidy system in a failed attempt to exert more influence over rice markets.

Tin has been one of the world's better-performing metals this year because so much of its supply comes from Indonesia, which has imposed restrictions on exports of raw commodities and tightened environmental rules around a notoriously polluting and under-regulated industry.

Those Who Wait
Tin is the only major base metal right now that you can buy more cheaply in three months
Source: Bloomberg
Note: Shows premium of later contracts relative to earlier ones, as percentage of earlier contract. Positive numbers indicate contango futures curve, negative ones backwardation.

It's in the sharpest backwardation of any of the major base metals on the London Metal Exchange, costing about $445 less if you're prepared to accept delivery in December 2017 rather than this month. That's generally a bullish sign for any commodity.

According to LME data, there's not a single ton of the stuff available for delivery in Europe. About 1,385 metric tons are warehoused in Malaysia's Port Klang, with another 105 tons in Johor to the south and 1,205 tons in Singapore. Add to that 30 tons sitting in South Korea's Gwangyang port and you have the world's total deliverable stocks -- 2,725 tons.

If I Only Had Some Tin
LME on-warrant tin stocks are at their lowest level since 2005
Source: London Metal Exchange, Bloomberg
Note: On-warrant stocks are those available for delivery. Canceled warrants have been earmarked by buyers and aren't counted.

So what's not to like if you're the player who's got their mitts on that dwindling pile of metal?

For one, the tin whale might not have wanted to get in this position. In small illiquid markets like tin, traders can end up holding an outsized share just because competitors are scare.

Open interest in tin contracts for delivery this month is running at only 4,236, with each equivalent to just five tons of tin. At current prices, that amounts to about $417 million, which sounds like a decent sum until you consider that JPMorgan had an $82.2 billion net position in the credit-default swap market before its more than $6.2 billion "London whale" loss in 2012.

Also, exchanges don't like corners to crop up in their markets, so these days there are normally regulations in place to punish those who try to take advantage. The LME rulebook allows the exchange to force traders to deal with counterparties and reduce their positions if it thinks the market is being manipulated -- the same sort of intervention that killed off the Hunt brothers' dalliance.

There's one last problem. Unlike the more commonly used LME metals, tin is almost entirely traded during the market's open-outcry ring sessions, so it's hard to hide behind an algorithm to disguise the fact you're the one sitting on a huge heap.

As a result, any short traders getting squeezed at the moment will be well placed to return the favor and punish their adversary once things start to turn. The problem with being the biggest whale in the market is that sooner or later you'll need to sell -- and when the shorts sense blood in the water, a feeding frenzy could ensue.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net