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RPT-COLUMN-Wild ride as tin tips towards scarcity pricing: Andy Home

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Andy Home
·5 min read
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(Repeats without change. The opinions expressed here are thoseof the author, a columnist for Reuters)

* LME tin price, stocks and time-spreads: https://tmsnrt.rs/2NMrbB9

* Shanghai tin price, volume and open interest: https://tmsnrt.rs/3bzuILo

By Andy Home

LONDON, Feb 22 (Reuters) - The bulls are running riot acrossindustrial metals markets as investors bet on global COVID-19recovery.

Copper has grabbed the headlines by surging past $9,000 atonne for the first time since 2011, but wildest of all is thetin market.

London Metal Exchange (LME) three-month tin hit itsown 10-year high of $27,000 a tonne on Monday morning after aweek of unprecedented spread turbulence. LME stocks remaindesperately low with no sign of relief from a squeezed physicalsupply chain.

Chinese speculators are now getting in on the action, withShanghai Futures Exchange (ShFE) tin jumping to life-of-contracthighs amid surging volumes and open interest.

While other metals are rallying on expectations of resurgentdemand and supply shortfall, genuine scarcity pricing isbecoming a reality for the tin market.

LME SUPER-SQUEEZE

The low-liquidity London tin contract has seen its fairshare of squeezes before, but nothing compares with last week.

The benchmark cash-to-three-month time spread flexed out to an extraordinary $6,500 a tonne backwardation atone stage.

The cash premium was still a massive $2,525 a tonne at lastFriday's close. To put that into perspective, the previousrecord was $730 during an ultimately ill-fated attempt tosqueeze the London contract in 2009.

Someone came close to paying that record just to roll aposition overnight last week. The LME's "tom-next" spread tradedat backwardation of $650 a tonne last Tuesday.

The exchange's positioning reports have consistently shownat least one, and as many as three, significant longs on the LMEcash date, but these positions are measured against historicallylow non-cancelled stocks.

The extreme premium for cash metal has drawn some metal intoLME warehouses. Inflows totalled 705 tonnes last week, most ofit arriving at Malaysia's Port Klang.

Any impact, though, was diminished by the ensuingcancellation in the same location of 300 tonnes in preparationfor physical load-out.

It seems that what comes into the LME system isn't going tostick around for long, which attests to the squeeze on thephysical supply chain.

PREMIUMS SOAR

The LME has stepped up its surveillance of the tin contract,unsurprisingly given the extreme time-spread moves last week,but an exchange spokeswoman told Fastmarkets "there is noindication that LME pricing has diverged from the underlyingphysical market".

To judge by Fastmarkets' assessment of the physical supplychain, that appears true.

The premium for tin in warehouses in the U.S. port ofBaltimore has almost doubled so far this year to a record $900to $1,100 a tonne.

The United States is physically short of metal and the costof container shipments from Asia has exploded owing to continueddisruption in the global freight sector.

LME stocks in the country total only 20 tonnes - deliveredonto warrant on Friday - and there are only 10 tonnes in Europeat Rotterdam. Fastmarkets assesses the European physical tinpremium at a lower $400 to $500 a tonne, but activity is said tobe minimal because no one has any spare to trade.

The global tin supply chain was hit especially hard byCOVID-19 mine lockdowns last year and is now struggling to keeppace with resurgent demand from the electronics sector.

Consecutive years of production deficit have depletedinventories along the supply chain in a slow-fuse trend that isnow exploding on the LME.

CHINA BULLS

There are stocks of tin in China. The ShFE has 7,401 tonnesof registered stocks, up by 1,926 tonnes since the start ofJanuary.

China, however, was a net importer of refined tin last year,reflecting both its own COVID-19 supply disruption and itsfaster manufacturing recovery.

Even if domestic producers can catch up with the country'sinternal demand, an inversion of trade in favour of exportswould need a profitable arbitrage window.

That could prove a fleeting phenomenon as Chinesespeculators flock into the Shanghai market, pushing the localprice up to life-of-contract highs and closing any gap withLondon.

Shanghai trading volumes were a record 287,569 contracts onMonday and open interest has mushroomed by 25% since Chinesemarkets reopened last Thursday.

This is a typical Chinese commodity market crowd surge asinvestors rotate into a market with eye-catching price momentum.

SCARCITY PRICING

Wall Street banks are warning about the potential forscarcity pricing in the copper market, but it has alreadyarrived in the tiny tin market.

The extremity of the LME price action - tin has risen by$3,500 a tonne in the space of a week - is signalling severesupply chain distress.

Until the physical pipeline from Asian supply to Europeanand North American buyers is refilled, premiums are going toremain elevated and LME short-position holders will be forcedto compete with the physical market for units.

Producers will, of course, respond to this screaming pricesignal, but the big question is how quickly they can do so.

Time is of the essence for holders of LME short positions,as it is for the producers themselves.

The flip side of scarcity pricing is what harm it does todemand.

The tin market has underperformed other industrial metalsover the past decade because of thrifting and miniaturisation inthe electronics sector.

The trend to use less tin in nano-soldering was a reactionto the super-high prices at the start of the past decade, whenLME tin rose above $30,000 a tonne.

Thanks to the yawning backwardations across nearby LME timespreads, the LME cash price last week touched a peak of $30,500.

If producers don't respond soon to calm the waters, tinusers will start formulating their own reaction.

(Editing by David Goodman)