MUMBAI (CommodityOnline.com) -- What an astounding rally tin prices have witnessed in the recent past. A lesser-known metal has slowly climbed to new highs. But a billion-dollar question is whether the current bullish momentum will sustain in long run or not. Earlier tin was considered unworthy of notice because its market was smaller as compared to its peers like copper, zinc and aluminium. The tin market of Kuala Lumpur and the London Metal Exchange are the key benchmarks for tin prices worldwide.
Now let's have a glance at the remarkable journey of tin, which has witnessed breathtaking bull run in the past. This massive bull run which has started since the end of 2005, where prices were hovering around $6,000 per tonnes went shooting up to more than $25,000 per tonne in 2008. That is an astonishing jump of 400% in merely 2.5 years. In 2008 alone, it has climbed from $16,000 per tonnes to $25000 tonnes, which is an amazing rally of 53%. The key reason behind the bull run is the uneven production from Indonesia and erratic exports from China.
Hedge funds have also played a key role in pushing the price of tin to all-time highs. Following the U.S. subprime loan crisis and a series of rate cuts by the Federal Reserve, the flow of funds to the commodities market sharply rose, as commodities were considered a safe haven against the weakening dollar. So, tin is among the commodities that has gained from the flow of new money.
This lesser known metal has many key uses like tinplate, tin alloy coatings, solder, pewter and chemical compounds. But in the current scenario, the significant use of tin is in soldering. Growth in the Asian electronics industry and replacement of lead-based solders are the key triggers for tin consumption in the world.
Current Scenario of Tin Worldwide
The record surge in the prices of tin is attributed to disruptions in supply coming out of Indonesia, which is having a pronounced effect on world supply, a decline in Chinese supply and an increasing use of tin in soldering worldwide.
Indonesia, the world's largest producers of tin, produced nearly 85,000 tonnes of tin in 2006, surpassed only by China who produced 100,000 tonnes in the same year.
It is interesting to note that marginal costs, the level at which production becomes unprofitable, is only $10,000 a tonne. The mining boom has created windfall profits for mining companies around the world.
Demand concerns have made the market more watchful of stock movements and prices are reacting heavily to inventory builds. A 30% reduction in Indonesian tin exports has caused the world demand forecast to outweigh predictions for supply by 30,000 tonnes.
Recently, the Indonesian government cracked down on illegal tin miners and smelters and instituted more stringent export regulations. China and Indonesia are confirming supply limitations for tin, which triggered a LME price jump above $25,000/metric tonne ($11.34/lb) for the first time.
Currently, apart from the supply demand fundamentals, its price is also being affected by investment demand. Despite the fall in production, tightness in the Chinese refined tin market has eased considerably since March because price elevation has curbed demand from packaging and electronic industries.
Let's Have a Look at Major Tin Belts in the World
Major deposits of tin are in South America and it runs from Bolivia over to Peru and right up into the Western Amazon area of Brazil. The bigger one though is over in Asia. It starts on the island of Tasmania off Australia and runs up through Indonesia and Malaysia, Singapore and on up through Burma and Vietnam on up to the outer reaches of China and Russia.
China: Thirsty Dragon for Tin
The surge in global tin prices is also due to a decline in tin production in China, which was partly due to extreme bad weather in January-February coupled with continuing shortage of concentrates and scrap for smelters.
In April 2008, production of refined tin stood at 11,703 tonnes, 10.5% lower than in the same month last year, while cumulative production in the first four months of this year, at 42,183 tonnes, was 11.9% down. However, the recent earthquake in Sichuan has not had any impact on tin operations.
China remains a net importer of refined tin. Since last September, China had only been a net exporter in one month, December 2007, when a small burst of export shipments preceded the imposition of a 10% export duty from January 2008. China is also stepping up its imports of tin concentrates, which rose 16% year on year to 590 tonnes in April 2008.
The tin market will also be supported by the fact that the China has imposed export duty in order to curtail exports, being a net importer of this metal. China introduced a 10% tax on refined tin exports from January 1, 2008 in an apparent push to keep more for its own rampant demand. This tax is likely to dent exports, and in turn, reduce global supply.
Recently, Yunnan Tin Co., the world's biggest producer, based in China's southwestern province, has halted shipments because of a lack of buyers willing to absorb China's new and higher export duty.
Indonesia Factor: Key to Tin Prices
Indonesia is the world's second largest producer of refined tin, behind China. Indonesian supply issues continued to dominate supply-side fundamentals in 2007, as the government continued its efforts to consolidate refined and concentrate tin production. As a result, global refined tin production fell 2% in 2007.
Recently, Indonesian government strictly implemented its existing export licensing system in place of earlier supply quotas in order to limit exports. Meanwhile, P.T. Timah of Indonesia reported a sharp drop in tin production in the first quarter of 2008. Indonesian supply uncertainty is expected to persist in 2008.
The recent exponential rise in tin prices, which have crossed over $25,000/tonne, has been fuelled by news about actual and potential supply problems in China and Indonesia, but some caution is advised at current levels for short term even though the long term scenario looks promising.
The rises reflect global factors such as strong economic growth, low interest rates, boom in China and increasing investor interest in commodities.
According to CRU estimates, consumption was flat in 2007. Coupled with falling supply, this led to an annual supply deficit of approximately 8,000 tonnes. The electronic solder business, the primary source of demand, continues to increase demand for tin, as the growing trend for lead-free solder persists. Consumption is expected to be strong in the first half of 2008, causing further surge in its prices.
There are so many factors indicating the strong uptrend in the prices but there are some factors, which could soften the prices as well. A U.S. recession or a slowdown in global economic growth could undercut tin demand. At the same time, if Indonesia loosens its grip on its tin production, a surge in tin supply could enter the global market.
Also, the current price of tin relative to current stock levels is unprecedented in the last two decades, suggesting that a price correction might be in order. However, the most likely scenario is that worldwide supply will likely remain depressed in 2008 with continued Indonesian regulatory uncertainty and the newly introduced Chinese tin export tax.
Tin is looking attractive for long term investors due to its strong fundamentals .The demand is strong, while the supply is decreasing. Supplies from Indonesia have been declining since the government cracked down on illegal miners in Bangka Belitung, while China has curbed exports by imposing export taxes on the metal, and Congo, Africa's largest tin producer, has banned the export of the metal from a big producing area of the country that is controlled by rebels.
It is expected that the tin price will further surge in the long term and surpass the price of nickel, making it the most expensive metal on the LME.
Sandeep Joon is a Research Analyst with SMC Comtrade Ltd. Republished by arrangement with www.commodityonline.com. .