Tin: How To Play the Bounce

By Julian Murdoch

Tin Cup, Pushing Tin, Cat on a Hot Tin Roof - tin shows up in pop culture all the time. It also shows up in everyday life - lining steel cans to make them suitable for food storage, replacing lead in solder and combining with other metals to make bronze and pewter. While "tin foil" and "tin cans" for soda have been replaced by aluminum for decades, it's still a mainstream industrial metal.

Tin is a relatively scarce metal - less common than lead, but nowhere as rare as rhenium. Seventy-five percent of the world's supply comes from Asia, but it can also be found in places like South America, Russia and parts of Africa. China pulls the most out of the earth, but unsurprisingly, China recently stopped exporting the refined metal, and imports of refined tin rose 20% in July compared with July '07. Indonesia ranks second in production, and is the largest exporter.

It's Indonesia's role as the world's largest exporter of tin that makes the announcement that Indonesia is planning to put a cap on production so interesting - or disturbing - depending on your point of view.

 

What's Up?

Tin, Cash Price

 

Tin has been on an upward tear for the past three years. A generally strong global economy has meant increased consumption of electrical goods of all kinds, and at least of third of tin is used in the solder that holds those electrical components together.

Another large sector that uses tin is for plating - food containers in particular. With the recent rise in food prices and a slower economy, consumers look for places to save money. High food prices can mean an increase in canned goods purchased because things like canned veggies tend to be cheaper than fresh, are subject to coupons and sales, and are easier to substitute than finding an alternative to milk. In other words, tin gets the benefit of having a food use, without the perils of being corn.

But the general trend of the economy doesn't explain why things got a bit more interesting for tin in the past few months.

Here's the chart for 2008, year-to-date:

 

Tin, Cash Price

 

On May 15, tin hit a new record of $25,500 per metric tonne on the London Metal Exchange [LME]. The drivers were supply concerns from top producers China and Indonesia, as well as generally low inventory levels. The record price couldn't find support and tin prices quickly came back down. Note that this chart (courtesy the LME automated system) looks more dramatic than it really is, because it's showing a fairly narrow band of prices. It's an old USA Today trick.

The strange thing is that prices continued to fall, even as inventories continued to fall.

 It is only just recently that tin prices have started to rebound - most likely due to continued supply problems. There are labor problems in Bolivia and month-and-a-half-long shipping disruptions in the Congo, though cargo is finally once again flowing through the port after settling yet another labor dispute.

On the plus side, the high prices have spurred talks of resuming tin mining in Thailand. The projected reserves are 41,460 tonnes, but production won't come on-line until at least 2009. And yes, that's a tiny amount of additional supply, but any new additional supply is making headlines.

Back On Borneo

In the past, Indonesia had a problem with illegal tin mines dumping tin on the market (and killing prices), but the government now requires export permits, and many of the small illegal mines have closed (but not all). Other small mining operations have closed as the cost of doing business rose. As the No. 1 exporter of tin, Indonesia not only has a lot of interest in keeping the price of tin high, it has the clout to do it. The markets acknowledged this clout with a 6% rise in price when the story of a production cap hit.

The expected limit of 90,000 tonnes of tin for this year probably won't be a problem. The largest tin mining company in Indonesia, PT Timah [TINS.JK], is expecting its 2008 production to drop to 50,000 tonnes - down from 58,086 tonnes last year because of production problems in the first half of the year. Assuming next year is normal, and not bogged down in labor, operational or other problems, the 2009 export limit of 100,000 tonnes may actually mean something serious.

Fair warning: Figuring out exactly how much Indonesia really produces can be a bit tricky. An article in the Financial Times put Indonesia's 2005 production at 140,000 tonnes produced, with 2007 down to 103,000 tonnes. The USGS' statistics put 2005 production at 80,000 tonnes, 2006 at 90,000 tonnes and 2007 at 85,000 tonnes. So either Indonesia will have to cut back a bit or ramp up a bit. With all due respect to the hard-working, underpaid government employees at the USGS, I'm inclined to believe the FT.

With the world in a tin deficit of 10,900 tonnes for the first half of 2008, low inventories and planned production caps by Indonesia - the stage is set for Indonesia to see the higher prices it is looking for.

Like quite a few industrial metals, tin is hard to play. If you can't trade LME contracts, you're pretty much limited to products based on the Rogers International Commodities Index, where you'll get a whopping 1%. Beyond that, you're digging into foreign, less-liquid, differently regulated markets, like Jakarta, where you'll find PT Timah and many of its competitors. Caveat emptor. Excelsior.