August 12, 2015 / 1:34 PM / 2 years ago

COLUMN-Why tiny tin stands out in the commodities rout: Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Andy Home

LONDON, Aug 12 (Reuters) - The commodities rout continues.

China's devaluation of its currency, or, officially, its "one-off move towards a market-oriented exchange rate" (delete according to preference), has sent industrial metal prices tumbling to fresh multi-year lows.

Well, all except one.

Step forward tiny tin.

On the London Metal Exchange (LME) three-month metal hit its six-year low of $13,365 per tonne on the last day of June, since when it has staged a modest recovery to a current $15,170.

Tin is one of the least liquid contracts traded on the LME and often has a perverse tendency to decouple from the rest of the base metals complex before belatedly catching up with the broader trend.

Is it doing the same again?

Quite possibly, but there are good reasons for thinking tin may continue to withstand the bigger storms rocking just about every other commodity.

****************************************************** Graphic on LME tin stocks and cash-3s spread: link.reuters.com/hyd45w ******************************************************

TIGHT LONDON MARKET

Firstly, the LME contract is going through a period of persistent tightness.

The front part of the forward curve has been trading in backwardation since the start of July.

The benchmark cash-to-three-months period CMSN0-3 flexed out to $170 backwardation on July 28, the tightest it's been since August 2010.

Things have calmed down a little since then but the backwardation is still there, valued at $18.50 as of Tuesday's close.

Interestingly, the cash premium has failed, so far at least, to attract any significant amounts of metal into the LME warehouse system.

There was a small build in headline stocks to above 7,000 tonnes in early July but since they have sunk back to 6,300 tonnes.

Open tonnage, meaning what is available for physical settlement of positions, remains extremely low by historical standards at just 5,610 tonnes.

That looks problematic given the positioning landscape on both the main August and September prompt dates, Aug. 19 and Sep. 16 respectively. <0#LME-FBR>

In August there's a sizeable long, holding positions equivalent to between 30 and 39 percent of open interest, facing off against three shorts. At the top end of that banding range the long could total 2,765 tonnes.

In September the small space that is the London tin market looks dangerously crowded with five longs staring at three shorts, one of them a big one at 20-29 percent of open interest, or somewhere between 3,600 and 5,500 tonnes.

Things, as they like to say on the LME "Street", could get interesting if stocks don't rebuild in the interim.

Interesting enough to deter aggressive short-selling.

****************************************************** Graphic on Indonesian tin exports: link.reuters.com/jaf45w ******************************************************

NON-TRADING INDONESIAN MARKET

Particularly since physical supply from Indonesia, the world's largest exporter of tin, is about to go through one of its periodic bouts of volatility.

Forget the regular warnings from Indonesian producers about withholding supply to support prices.

The country's smelters, particularly the cluster of smaller ones operating on the Bangka and Belitung islands, have signally failed to display sufficient discipline in the past to cause the London market too many headaches.

The two big interruptions to exports, in September 2013 and November 2014, were due to the government tightening the export rules.

And the government has just done so again as part of a long-running campaign to try and instill some order on its unruly tin production sector.

The latest set of regulations require exporters to present proof that they are sourcing their tin from mines certified as "clean and clear" by the government and proof they have paid up all their royalties.

As with the previous two major rule changes, this is not going to be a seamless process. Even PT Timah, the biggest official producer, is expecting some sort of disruption to its shipments.

The clearest sign of pending problems with exports is the complete lack of trading on the local exchange.

The 2013 rule changes required all exports to be traded first through the Indonesian Commodity and Derivatives Exchange (ICDX).

Since when ICDX volumes have given a proxy snapshot of export volumes. The correlations are imperfect, partly because of what the ICDX calls "bona fide" trades, which don't appear in the official volume figures.

However, none of the five ICDX tin contracts has traded at all since July 15.

And zero is zero. That points to a drop-off in export volumes in the next couple of months. The only question is how severe it's going to be.

BRIGHT SPOT DESPITE DIM BACKDROP

None of which is to argue that tin's fundamentals right now are any better than any of the other industrial metals.

A market that is perennially forecast to be in supply-demand deficit has a long track history of defying expectations.

Everyone is rightly concerned about the new source of supply that is Myanmar and the continued strong flow of raw materials into China.

China, once a major importer of the soldering metal, has become increasingly self-sufficient thanks to its neighbour, as evidenced by much reduced appetite for refined tin imports.

Tin's demand profile, not the most exciting at the best of times, is facing all sorts of challenges from the miniaturization of circuit boards and innovations in soldering technology.

But right now the combination of technical market tightness and potential physical tightness is keeping it afloat while all around are sinking.

For how long we'll see. (Editing by William Hardy)

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