How Chinese Competition Is Keeping Down Tin Prices
When the supply of a commodity is low and falling, the price should rise. Why is tin seemingly immune from this basic law of economics?
Inventories of the non-ferrous metal are at 20-year lows at the London Metal Exchange. Historically, such scarcity would have caused spikes in prices, but they are foundering, down more than 5 percent since the beginning of the year, and trading below $20,000 per metric ton. The reason most likely has to do with exchange trading competition from China.
LME Tin Warehouse Stocks (total and net)
In fact, tin, along with nickel, are the worst performers of the LME base metal complex. This contrasts with 2016 when tin was the second best-performing nonferrous metal, behind only zinc.
Tin is primarily used in the production of solder, for the plating of iron and steel products such as cans, containers and construction and for electrical applications. It stands out for its corrosion resistance, non-toxicity and attractive finish, as with stainless steel. Tin is also used in the production of bronze, pewter and die-casting alloys and in lithium-ion technology (extending battery life).
In the U.S. tin has not been mined since 1993 or smelted since 1989. The majority of the metal is produced in Asia, making the U.S. import dependency rate about 75 percent, with the balance coming from recycled old and new scrap.
Low inventory levels have also historically resulted in an increase in both volume and open interest; however, for LME tin they have been falling, too. Average LME daily tin volumes this year slipped by 14 percent from January to April, compared with the same period a year earlier. On an annual basis they fell 7 percent in 2016 and 31 percent in 2015. Open interest has also been declining, totaling 16,152 lots at the end of April, compared with 22,563 lots a year earlier.
What has changed over the years is that the LME is no longer the sole go-to exchange for data and information on the metals markets as it had been historically. In fact, the Shanghai Futures Exchange has taken over in the race to dominate the metals markets.
Today, there’s a greater amount of tin inventory sitting with the Shanghai Futures Exchange than with the LME as of May 12 (3,738 metric tons). While this level is off its highs, it has been rising over the last few weeks, even as global production is slowing. In fact, world tin production decreased in 2016, totaling 280,000 metric tons compared with 289,000 metric tons in 2015. Much of this supply/demand discrepancy has to do with increased recycling of tin, a particularly expensive metal, which stifles the demand for the newly refined material.
The differences between these two exchanges are also evident in the structures of their respective futures curves. Low stocks typically create tightness in short-dates time-spreads such that, as expected, low LME tin inventory is generating tightness in the near months resulting in a backwardated market (near term contract trades at a higher price compared to longer dated contracts).
Meanwhile, the lack of tight supply in Shanghai tin results in quite a differently shaped yield curve, as the front end of the curve is trading in contango, reflecting what a balanced commodity curve should look like.
Shanghai Official Prices Curve
Contributing to this supply discrepancy is that Indonesia, the largest importing nation and the second largest producer behind China, is in an unusual position of being supply sufficient. This stands in contrast to a year ago, when shipments were hit by heavy rains, in addition to a government-imposed tightening of export regulations. As of the end of April, the shipment count was 24,400 metric tons versus 16,600 tons a year earlier. Furthermore, the elimination of China's 10 percent export tax on refined tin has escalated the flow of the metal globally.
From the demand side, China, the world’s largest tin consumer, has exhibited lackluster demand in recent months, with imports totaling just 1,757 metric tons in the first quarter, down from 2,400 tons year-on-year. Supplies of tin ore to China from Myanmar have dropped significantly from last year, while China aims to enforce heavier environmental standards related to mining and refining.
The bottom line is that attempting to arbitrage LME and Shanghai tin is not as easy as it may seem (different currencies, contract sizes, terms, and so on). But suffice it to say, assessing the tin markets from a more global perspective will undoubtedly provide a better perspective not only on the tin market, but on the world’s economy.
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