A recent article from Thomson Reuters explores the growing disconnect between Chinese import figures and metals prices.
Chinese import volumes are taken as a direct reflection of Chinese consumption and are, therefore, a good indicator of global demand for metals during the commodities supercycle, but over the last year metals prices have slid while import volumes have generally risen.
This has made evaluating the fundamentals for metals harder, and none more so than for Tin. The Indonesian ban on raw material exports at the beginning of this year has seen a dramatic reduction in ore exports which would be expected, but not the corresponding rise in refined metal exports that’s come with it, or at least not yet.
Forcing The Refiner’s Invisible Hand
Indonesia has limited refining capacity, a position that the ban on raw materials is intended to address by forcing miners to refine metal domestically, but Indonesian refined tin exports declined in March to 5,847 million tons from 5,997 mt in February. This brought Q1- 2014 exports to 16,458 mt, well down on the 22,825 mt exported in Q4-2013 and the 26,805 mt exported in Q1-2013. A very significant proportion of Indonesia’s refined exports go to China, indeed China has been a net importer of refined tin since 2007, but Reuters tells us the pace of imports has dropped sharply since the middle of last year.
China’s first-quarter net imports of 1,722 tons were less than half the amount imported in the first three months of 2013. The answer isn’t hard to see, mining investments by Chinese firms in neighboring Myanmar are bearing fruit with concentrate imports tripling last year and rising by another 17% in the first quarter of this year, with material from Myanmar accounting for 95% of the 38,300-ton flow. Although this material from Myanmar is low-grade, the new source of supply for Chinese smelters has no doubt blunted Chinese demand for refined metal, particularly as consumers will have built inventory ahead of the Indonesian ban.
Prices Steady Regardless of Exports
In spite of the reduced Indonesian exports of refined metal, however, physical delivery premiums have remained steady suggesting the market is still well-supplied. On the London Metal Exchange warrant cancellations have jumped to more than 50% of inventory for the first time since 2012 according to a Standard Bank report to clients.
Spreads between spot and forward dates have also tightened and a small number of players have taken very substantial cash warrant positions. The Standard Bank report suggests the combination of a sharp reduction in on-warrant stock, tighter spreads and market positioning looks set to keep outright prices well-supported while volatility in the spreads is also likely to remain high. So, yet again, the apparent fall in Chinese refined tin imports should not be seen as a negative sign of future price direction for the metal, quite the contrary, prices could become more volatile in the coming weeks and months.