Tin – Driven by Fundamentals

What a satisfying graph the twin tracks of tin price and inventory levels makes for a simple minded analyst.

In an ideal world, we like to see rising inventory weigh on sentiment and prices while falling inventory suggests a market in deficit and gives support to rising prices, unlike the perplexing rise in inventory and stubbornness of price that we have seen in the aluminum market. Non futures traded metals tend to react more “logically (for which read simply) in the manner outlined above but the presence of a futures exchange opens (at least over short time periods) the opportunity for more sophisticated plays to be dealt and confusing price behavior.

Tin has supply constraints and yet along with all base metals demand has come back relatively strongly last year and this. Consequently, exchange inventories have dropped and the price has risen. Tin has the best fundamental prospects of all the base metals and will be the first to reach a new all-time price high, Stephen Briggs, metals strategist at BNP Paribas is quoted as saying in a Financial Times article.

Briggs went on to say, “World tin mine production peaked as long ago as 2005. A further decline in Indonesia, serious supply constraints elsewhere and only small sources of new supply suggest that mine output will at best be flat in 2010. It may grow by just 4% in 2011, with little further progress in 2012. Indonesia’s problems do not appear to be getting any better in spite of significant investment in the development of offshore placer deposits, production is not markedly up.

As recently as last month, a Reuters poll of analysts averaged opinions to place tin at US$18,767 per ton this year and US$18,550 per ton in 2011. As the graph shows, excessive stock levels built up at the end of last year have already been significantly reduced and most of the analysts expect the tin market to become genuinely tight over the next 12-18 months. Unlike the wider analyst poll, Briggs more bullish position seems to be appropriate when you look at where the price has moved since the July poll. So where did he see prices late this year and next?

“We expect the tin price to move comfortably above $20,000 a ton before the end of 2010, and see an even stronger advance next year, with the metal probably topping the May 2008 record high of $25,500 sometime in the second half of 2011. Sky-high prices may eventually be needed in order to ration demand.

Still got a forward position to cover? Anywhere south of $20,000 per ton may prove a decent price by the first quarter of next year if Mr Briggs is correct.

–Stuart Burns

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