Indonesian Price Support Kicks In for Falling Tin Market: An

Bareksa.com - Indonesia's tin exports slumped to a one-year low of 3,595 tonnes in August.

And they are set to fall further in September. Shipments from the world's largest supplier of the soldering metal will be reduced to what Jabin Sufianto, president of local Indonesian tin association AETI, describes as "a trickle".

There is no mystery to what is happening.

Indonesian producers are once again flexing their collective muscle, imposing a de facto moratorium on exports until the tin price recovers from its recent swoon.

The clear intention is to deprive the market of supply until such time as the international price on the London Metal Exchange (LME) moves up to match the targeted domestic price on the Indonesian Commodity and Derivatives Exchange (ICDX).

And the early signs are that the strategy is working as LME stocks fall and the cash price responds to a corresponding tightening of the front part of the forward curve.

This sort of price support action from Indonesia is becoming part and parcel of the global tin market. Its continued success, however, is increasingly going to depend on other producers at least tacitly playing ball.

PRICE DOWN, EXPORTS DOWN

ICDX trading volumes provide an early steer on Indonesian export volumes, since in theory everything that leaves the country must first be traded on the local exchange.

The relationship is not perfect.

Exports of tin ingot so far this year have totalled around 43,000 tonnes, outpacing ICDX volumes of 32,000 tonnes. The gap is partly explained by what locals call "bona fide" sales, which don't make it onto the ICDX trade figures.

Then there is the seepage into the international market of tin in other forms such as solder, alloy and wire, a practice that is being targeted by a new set of Indonesian export rules due to kick in from November this year.

But ICDX volumes are still a useful barometer by which to measure Indonesian export supply after factoring in a time-lag between trade and shipment.

Moreover, any statistical caveats are overridden by the almost complete evaporation of ICDX tin volumes since the start of this month.

After averaging 4,600 tonnes per month in the June-August period, traded volumes have totalled just 150 tonnes thus far in September. Even allowing for some extra "bona fide" sales, it's clear that exports of ingot are going to grind to a near halt.

The trigger for this collapse in trading activity was the decline in the LME price through the $22,000-per tonne level at the end of August.

The slide has extended to $20,875 this month. That's the lowest tin price since August 2013.

EXPORTS DOWN, PRICE UP

It's also a price level at which many of Indonesia's smaller producers clustered on the tin-rich islands of Bangka and Belitung claim they can't make any money.

So they have stopped trading on the ICDX and they have stopped shipping, as they have done before when the LME price has fallen below the $22,000-23,000 area.

The intention is clear.

To quote Jabin Sufianto again; "Let's see what happens when the LME stocks get below 8,000 tonnes...at 8,000 they will start panicking".

Well, LME stocks aren't quite there but they have fallen sharply over the last few days.

From a late-August high of 13,325 tonnes they have shrunk to a current 9.890 tonnes, reflecting a clear-out of the cancelled tonnage at the Malaysian locations of Port Klang and Johor.

No panic yet but there has been a reaction in the front part of the LME curve. The contango across the benchmark cash-to-three-months period has almost halved in the space of a few days to $25 per tonne as of Tuesday's closing evaluations. Unsurprisingly, the outright price decline has come to a halt.

Going forwards LME tin spreads and prices will be highly sensitive to any further cancellations of LME stocks, the precursor to metal actually being loaded out of exchange warehouses.

Indonesian producers are betting, again, that they have sufficient leverage over global supply to force the LME price up to where they are prepared to sell.

CHINA WILD CARD

It's a plan that depends on no other producer being able to replace Indonesian supply.

Given the well-documented constraints on most of the world's established producers from falling ore grades and a lack of historic investment in tin production, it looks a good plan.

The only danger comes from China, itself the world's biggest producer but one which has in recent years struggled to meet its own demand and relied on imports to fill the gap.

Tin smelters in China suffer from the same challenging economics as those in Indonesia, namely high-cost and dwindling raw materials supply and squeezed margins resulting from a low refined metal price.

But they are currently lifting production at a fast rate. Official numbers from the National Bureau of Statistics tend to pose as many questions as they answer but the overall picture is still pretty clear-cut.

China's national output of refined tin in the first eight months of this year was 116,000 tonnes, up almost 16 percent on the same period of 2013.

The outright figure, if correct, would represent an all-time high run-rate while the year-on-year growth marks a step-change from the 2-3 percent achieved over the last couple of years.

The result has been a sharp slowdown in import demand. China's net imports of 4,255 tonnes in January-July of this year were the slowest since 2007, when the country was still a net exporter.

It's possible that more is happening beneath the surface of the official trade figures. China has in the past hit the export market with tin in forms that don't make it onto the official radar.

In theory Chinese smelters are no more incentivised to supply the rest of the world in a low-price environment than are the Indonesians. But theory and reality can be strange bed-fellows when it comes to Chinese metals trade.

The proof will come in the form of those LME stocks and whether they do indeed sink to "panic" levels in the coming days and weeks.

If so, Indonesian pricing power will be reaffirmed. If not, Indonesian producers will have to make some painful choices. (Source: Reuters)