Is Tin Set To Pop The Price Bubble?

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A recent Bloomberg article suggested that although tin prices are currently strong they are expected to come off in the short term due to slowing domestic Chinese demand. The same article states half the tin consumed in China is used in electronics soldering, a previously robust area of value add growth for Chinese companies. But a combination of rising wages costs, softening demand due to lower exports to the west and the appreciating RMB have significantly reduced growth prospects. China’s quarterly trade surplus shrank for the first time in more than three years from January to March due to falling exports. Many small electronics factories in the southern province of Guangdong were being closed after China’s new labor laws mandating minimum wages and setting limits on over time raised production costs.

China’s domestic tin prices are starting to drop lower than world prices as demand softens and rising production pushes the market into over supply. Although China became a net importer of tin this year, following the imposition of a 10% export tax this January, higher export prices could over come this and encourage exports again. Many say the retreat of China as a major exporter is the primary reason for the current high world prices.

Across in another Bloomberg article, UBS head of metals strategies is quoted as saying we would be loath to go long on copper, even though prices have rebounded strongly on the back of strikes at Codelco’s Chile mines and slightly lower LME stocks.  Of more importance should be softening demand.

Finally the Wall Street Journal has an interesting article blaming the Fed for loose monetary policy feeding the current commodities boom while failing to solve the credit crunch which was primarily a bank confidence issue not a consumer confidence issue.

So what are these worthy commentators saying? It reads very much to me like the following:

Prices may be firm at the moment but demand is softening not just in the west but in Asia too. We don’t see current price levels being maintained. The current levels are clinging to every supply disruption hitting the headlines to maintain their elevated status but they are mainly being held up by the hot air of US inflation and a falling dollar. At some point that dollar will stop sliding (let’s not think about what would happen if it didn’t, it doesn’t bear thinking about), probably when the continual cuts in Fed rates stops, something Ben Bernanke says is about to happen soon. If that puts a floor under the dollar we could indeed see investors losing their appetite for metals and a return to a more reasonable balance of supply/demand control factors influencing the price. Not a moment too soon for most consumers.

–Stuart Burns

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