We have said it before, but we are not great fans of using stock levels as a predictor of price trends or even as a proxy for wider physical market metal availability — however, in the case of the tin market, LME stock position is the surest illustration of a market under extreme duress.
Tin market surge
A Reuters report this week explains in succinct terms why prices have hit seven-year highs. The three-month price has hit $23,435 per metric ton. Meanwhile, the tight spot market has reached $25,001/ton.
Holders of metal will no doubt be taking advantage of the metal’s scarcity. However, this is by all accounts not an engineered squeeze.
In fact, it is the result of three years of global deficits, Reuters reports, citing International Tin Association data.
A combination of pandemic hit supply, logistics delays in deliveries, and economies roaring back after lockdowns – particularly China’s electronics industry – has drained physical stocks held in places like the LME to just 810 tons.
Worse, 310 tons of that is awaiting physical load out, leaving just 500 tons.
That is just half a day’s global consumption available for physical purchase.
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Demand for spot
Not surprisingly, in such a tight market the demand for prompt or spot metal is intense.
Demand has driven the premium for cash over three months to a record $1,485/ton.
Normally, such a huge cash premium would suck metal into the LME system.
However, as Reuters observes, it’s unclear if any metal is actually available, with logistics and supply-side issues remaining as bad now as they were late last year.
As you would expect, China is part of the problem. After years of being a net importer, the country became a net exporter in 2018 and 2019 when it removed export taxes.
But last year’s surge in electronics demand sucked in imports and added to existing global supply problems caused by the pandemic, exacerbating the global deficit position.
Not surprisingly, investors on the Shanghai Futures Exchange jumped on the bandwagon in January and bought into the relatively new tin contract. The contract launched in 2015 and had previously not attracted much retail interest.
The equivalent of almost 500,000 tons traded over just two days at the turn of the month — more than a year’s worth of global tin production, Reuters reported. Market open interest hit a life-of-contract high of 80,686 contracts. The total underlined the speculative component, as both trade and retail investors jumped on the bandwagon.
The consensus is the market could yet go higher.
Physical metal to relieve the tightness remains elusive. Furthermore, economies outside of China are expected to pick up demand as vaccine programs pick up pace this spring and summer.
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