(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON, May 12 The London Metal Exchange (LME)
is running short of tin.
Headline stocks of the soldering metal in the LME's
warehouse system fell to 2,290 tonnes this week.
It's the lowest level in at least 20 years but in truth any
historical comparison is lost in the mists of time because the
world of metals trading and the LME's place in that world were
so different back then.
Unsurprisingly, low inventory is once again generating
tightness across short-dated time-spreads, extending a pattern
that has been running for a couple of years now.
But the outright price is underperforming. Tin, currently
trading just shy of $20,000 per tonne, is down more than 5
percent on the start of the year and vying with nickel for worst
performer among the major LME metals.
Which begs the question of whether the LME is reflecting the
wider state of the market or its own dwindling liquidity.
There is, for example, now more tin sitting in warehouses
operated by the Shanghai Futures Exchange (ShFE) than in the LME
Graphic on LME and Shanghai Futures Exchange stocks:
BACK TO BACKWARDATION
The LME tin contract spent much of last year in
backwardation, cash metal commanding a scarcity premium over
forward dated prices.
After a brief respite in the first quarter of this year,
when LME stocks rebuilt to 5,995 tonnes in mid-February,
tightness has returned.
The benchmark cash-to-three-months LME spread CMSN0-3 was
valued at $71 per tonne backwardation at the Thursday close.
The LME's "tom-next" spread, which is the cost of borrowing
metal for a day and which is often a flashpoint for positioning
tension, flared out to $19 backwardation on Friday. That's the
widest since last October.
This may have something to do with a dominant long position
that has been holding between 50 and 80 percent of LME stocks
over recent days. <0#LME-WHL>
But LME stocks are so low that it may be nothing more than a
passing misalignment of long and short positions. In such a
crowded space as the London tin market, it doesn't take much
movement for borrowers and lenders to trip over each other.
BUT NO SHORTAGE?
The curious thing is that right now there is no particular
sign of broader physical tightness in the tin market.
Indonesia, the world's largest exporter of tin, is enjoying
one of its rare periods of supply regularity.
This time last year, shipments were hit by a double whammy
of heavy rain on the tin-producing islands of Bangka and
Belitung and another tightening of export regulations by the
This year, Indonesian shipments have been running smoothly.
The official export count was 24,400 tonnes in the first four
months of 2017, compared with 16,600 tonnes a year earlier.
China, the other major tin player on the world stage, seems
to be in internal destock mode.
Certainly, its call on refined tin from the rest of the
world has been subdued in recent months.
Imports totalled just 1,757 tonnes in the first quarter,
down from 2,400 tonnes in the first quarter of 2016.
And that despite reduced imports of raw materials from
Myanmar, which has emerged as a major supplier to China's tin
smelters in recent years.
Tin producer association ITRI estimates that the amount of
contained tin flowing in ore from Myanmar to China fell to
between 12,000 and 14,000 tonnes in the first quarter from
20,000 tonnes a year earlier.
The quality of the ore has improved, according to ITRI, but
the tonnage has fallen as stockpiles in Myanmar's Wa County have
Despite declining raw materials supply and reports of
periodic smelter shutdowns as Beijing environmental inspectors
fan out across the country, there is no sense of scarcity in
There are 3,738 tonnes of refined tin registered with the
Shanghai market, more than in the LME's global warehouse
The very front part of the ShFE contract structure is
trading in contango, in stark contrast with the LME contract.
Is the tightness that is becoming hard-wired into the London
contract more about the state of the LME tin contract than the
The broad decline in LME trading volumes has been much
discussed and triggered a new consultation process as to how the
venerable old dame of global metal trading should position
itself going forwards.
But volumes in tin, already one of the least liquid metal
contracts traded on the LME, have been falling faster than the
Average daily LME volumes fell by 5.1 percent year-on-year
in the January-April period. Tin volumes slumped by 14 percent.
That follows a 31 percent slide in total volumes in 2015 and
a 7 percent drop in 2016.
Open interest has also been declining. It totalled 16,152
lots at the end of April, compared with 22,563 lots a year
It's hard to work out cause and effect in this drop-off in
trading activity in London. Lower volumes may simply reflect
recent low-volatility, range-bound price action.
Volumes in Shanghai have also dropped over the first part of
this year, albeit from a level last year that reflected the
broader surge of speculative Chinese money across the domestic
commodity exchange spectrum.
But the trend of lower activity in London has been running
for more than two years now and the market's evident struggle to
attract stocks raises questions as to whether it is losing some
of its global draw to Shanghai.
The relationship between the two is likely to be further
It took a much stronger LME cash premium of more than $200
per tonne in the fourth quarter of 2016 to suck in metal and
force a stocks rebuild.
With arrivals in the LME system still at subdued levels, it
looks as if it will take something similar to help refill
depleted LME sheds.
What has changed between then and now, however, is the
elimination of China's 10 percent export tax on refined tin.
In theory, if the LME backwardation flares out sufficiently
to open an export-friendly arbitrage, Chinese metal should flow
to the LME.
What happens in practice will say much as to how the London
and Shanghai markets will co-exist now the tariff wall has been
(Editing by Dale Hudson)