Tumbling Indonesian tin exports could short-circuit electronics industry

Reuters

* Tin buyers unable to agree 2014 term shipments

* Indonesia usually supplies more than a quarter of worldexports

* Tin supplies critical for Japanese and Korean electronicsfirms

* Risk if supply problems persist beyond a few months

By Melanie Burton and Michael Taylor

SINGAPORE/JAKARTA Oct 11 (Reuters) - Tin buyers are becomingincreasingly nervous about securing enough of the metal incoming months to supply industries such as electronics, afternew Indonesian trading rules cut shipments by the world'sbiggest exporter nearly 90 percent last month.

More than half of global tin goes into solder used in electronics, to make circuit boards for products ranging fromsmartphones to tablets produced by firms such as Blackberry and LG Electronics. Tin is also widely usedin food packaging as a protective coating to line containers.

Fearing disruption, tin suppliers snapped up recordIndonesian stocks in the first half of the year, and have amplemetal on hand for the next one to two months, traders said.

Further out, however, there could be a threat to theoperations of electronics makers if export problems persist.

"The biggest issue is for the consumers in Asia, whereIndonesia is two thirds of supply in some cases," said PeterKettle of global industry group ITRI.

"For somewhere like Japan or Korea, Indonesia is absolutelycritical and there is just not enough tin around from othersources to replace it," he added.

A major Japanese solder maker, which buys tin fromIndonesia, said it was carefully watching how things develop.

Indonesia brought in new rules on Aug. 30 to force tin ingot shipments to trade via a local exchange before export. The newpolicy aimed at giving Jakarta greater influence over prices hasslashed trade and meant that the long-established process ofbuyers and sellers agreeing term deals has stalled.

PT Timah, Indonesia's biggest tin exporter, inlate August declared force majeure on shipments as its buyershad not joined the Indonesian Commodity and Derivative Exchange(ICDX), the only approved exchange for tin trade.

The stand-off with tin buyers, some of whom are reluctant touse an exchange still establishing itself, helped push Septemberexports down to 786 tonnes last month, from more than 6,000tonnes in August, the lowest since early 2007.

Benchmark tin prices on the London Metal Exchange have climbed by more than 10 percent since late August as buyersstocked up due to worries about Indonesian supply, helping makeit the best performer in a weak base metals complex this year.

Some buyers are waiting things out in the hope thatIndonesia relaxes rules to revive exports, to help cash-starvedproducers.

"People are worried about it but they're not panicking yetbecause recent history suggests that the Indonesians will find away -- it's just a question of how long that takes," said LeonWestgate at Standard Bank in London.

A tin consumer who buys from Indonesia and sells productsto electronics companies said the firm was already looking foralternative sources of supply, though these appear limited.

"We have a deadline -- everything has to be decided bymid-November," he added, referring to the latest point hiscompany must secure its monthly supply deals for 2014 shipments.

MAKE TIN A MODEL

At the metals industry's biggest event in London this week,the consensus was that Indonesia would give some ground to allowexports to flow.

But some traders noted a concern that Jakarta would hold outin order to make tin a model of how it intended to squeeze morefrom other commodities exports.

Indonesia has long sought to have a greater sway over globaltin prices through trading at home, with officials complainingthat speculators have too much influence over LME prices.

An Indonesian regulatory official last month said that tintrading rules were designed to boost prices, but some traderssaid because Indonesia's physical tin contract did not havefutures it was tough to hedge and lacked sufficient trade.

ICDX's most liquid contract traded 159 lots(795 tonnes) in September compared to 195,084 lots (975,420tonnes) traded on the LME.

The Indonesian exchange's chief executive Megain Widjajasaid via email ICDX did plan to introduce futures contracts andsaid there should be alternative ways to hedge in the meantime.

Indonesia in July also issued rules on new purity levels tolower lead content in tin exports with the aim of boosting thevalue of exports.

But under the new trading rules, buyers can no longer choosethe specific brand of metal they get, meaning some traders said there is a risk the tin they get via the exchange may haveimpurities that make it useless for consumers.

Widjaja of ICDX said the purity of the metal was guaranteedby a ministerial decree and checked by surveyors, while it alsocarried out its own checks.

A QUARTER OF WORLD SUPPLY

Indonesia usually exports around 100,000 tonnes of tin ayear, more than a quarter of the world's supply, selling tobuyers in Japan, China, Malaysia, Thailand and Singapore.

Tin stocks in LME warehouses have slumped by 15 percentsince the new rules came into play to hit nine-month lows ofaround 13,000 tonnes and there are few readily availablealternative sources of tin globally.

So far, there is no sign of a desperate scramble to buystocks that could show up as cash futures prices trading at apremium to three-month futures prices, known as backwardation.

But a metals trader at a Western bank said beyond a month orso supply risks were rising.

"We need to follow up quite carefully on what will happen inthe next few weeks and then if there is no change, it's going tobe a bit more worrying for the rest of the big players."

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