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Mysterious 'tin man' could trigger 2010 price hikes

The price of tin, which is widely used in food packaging and to solder electronic products, is expected to increase in 2010, not because of supply/demand fundamentals, but because of possible stockpile manipulation.

LONDON, Dec 17, 2009 (Purchasing) By Tom Stundza

Demand for tin is weak, production is expanding, inventories are enlarging and, yet, prices could jump by almost 40%. Key reason: Stockpile manipulation by an unnamed investor in London.

Analysts say the mysterious investor, most likely the manager of a hedge fund, has amassed dominant ownership—about 90%—of London Metal Exchange stocks of the plating and alloying metal and is sitting on thousands of metric tons of tin in warehouses across London. The result, analysts say, is "backwardation"—a situation in which futures-contract prices are lower than spot prices.

In fact, a consensus of market experts project the world tin price could increase 12% in 2010 to $6.82/lb from the expected 2009 average of $6.10. However, they say the price could jump 38%, back to the $8.39 of 2008.

LME CEO Martin Abbott disputes the effect of the investor, telling attendees at the annual LME dinner in October that "the tin market is operating properly and in orderly fashion." The LME does not identify individual investors who make large investments on the exchange.

Indeed, some analysts expect increased industrial use of the metal in coatings for steel containers, solders for joining pipes or electrical/electronic circuits and ingredients in bearing alloys and glass. PT Timah, the world's second largest producer of tin, and some other forecasters see 6%–7% consumption growth next year to 313,000–318,000 metric tons.

Still, other analysts say market fundamentals by themselves would dictate lower prices. K. C. Chang, of Global Insight's Pricing and Purchasing Service, says fundamental demand for tin remains weak because of dormant economic activity in end-use markets. Atop that, tin demand is expected to be far from robust during the early months of recovery in 2010, he adds.

Chang expects employment and investment in the mining sector to decline through 2010 "as the fragile economic recovery injects additional market volatility." Rising inventory levels resulting from waning Chinese buying and a slower-than-expected global recovery will delay additional investment spending, he says.

Some analysts estimate that world tin consumption is likely to fall by at least 11% in 2009 to 296,000 metric tons from 331,000 metric tons in 2008. While demand has picked up in both solders and tin chemicals markets in the second half of 2009, purchasing has remained weak in the electronics sector. But, demand for tinplate—the alloying metal's biggest market—has remained relatively steady throughout the recession, says analyst Carl Firman at BNP Paribas Fortis in London.

Excess metal supply may cut price hikes

Other statistics on market fundamentals bolster arguments that prices should fall. For example, mine output has fallen sharply in the world's largest producing nations of China, Indonesia, Peru, Bolivia and the Congo. Refined production also is lower across key tin-smelting states of China, Indonesia, Peru, Malaysia and Thailand. Inventories have remained excessive and are depressing market prices. So, the industry now faces a challenging environment of lower revenues and difficult credit markets. "Cash and working capital have become valuable resources in a turbulent global economy starting its recovery," says Firmin.

Indonesia, especially, has been affected by the economic downturn and falling commodity prices. PT Timah switched emphasis to offshore mining operations because of a decline in tin deposits on land. The Indonesian government launched a fresh crackdown on illegal tin ore mining late in August in the country's main tin producing islands of Bangka-Belitung and in Borneo's West Kalimantan province. The crackdown prompted at least seven smelters to shut due to lack of tin ore as small miners temporarily stopped operations.

This isn't new. In October 2006, dozens of small tin smelters closed after police launched a massive crackdown on illegal tin mining and smelting on Bangka island. After the crackdown in 2006, the Indonesian government introduced rigid tin export rules in the following year, which only allow smelters to export refined tin if they can produce it with a minimum purity of 99.85% and source ore from legal tin mines or team with miners holding permits.

With the market weak, many other companies cut tin production in 2009 in an effort to buoy prices of the metal. That didn't work, though, as global tin stocks have risen from less than 8,000 metric tons at the start of the year to almost 27,000 tons in late October.

"The tin market is over-supplied," says Firman, who adds that it will take some time to lower stockpiles because of expanded 2010 supply, especially by Indonesia. That country's exports of tin exports will be boosted as a consequence of government-authorized restarts of the Bangka-Belitung Timah Sejahtera consortium's smelters. The affected smelters are operating at 30% of capacity for the rest of this year but Firman says they are expected to increase output gradually next year to their 2,800 metric ton/month capacity.

But the market may not need all that metal. Projecting "hot" and "cold" nonferrous markets in 2010 at the Mining 2009 Convention in Brisbane, Australia, in late October, analyst Allan Trench of CRU Consulting says that tin will be "one of the coldest commodities in 2010."

Which brings us back to that mysterious investor, who, according to the British newspaper The Telegraph, "is turning the tin market on its head."

Industrial buyers reportedly are furious that they are paying $300 a metric ton more for immediate-delivery metal than it would cost them to buy three-month futures contracts. They argue that a contango—where spot prices are lower than forward prices—is considered normal for tin because of the interest, warehouse costs and insurance incurred in carrying the metal.

Traders also claim that the investor's dominant position has made the market illiquid and disorderly with distorted prices. "It's a ridiculous situation to have when there is clearly not a shortage of tin and the LME is refusing to admit that anything's wrong," a metals trader tells The Telegraph.

So why would an investment fund make a decision to stockpile a metal when there is a surplus of tin around the world? At the start of November, tin for three-month delivery was trading above $15,000/metric ton on the LME, a 40% rise in monthly prices after a 53% drop last year. But the mysterious buyer is clearly convinced that the commodity's price has further to soar—especially if China, the world's biggest consumer of tin, and Korea, Taiwan and Japan fire up its consumption in coming months.

Neil Buxton, managing director of GFMS Metals Consulting, believes that the investor is playing a risky game. "It's easier to do with tin than copper or aluminum because those would be prohibitively expensive," he explains. "But it could backfire if the LME set conditions against that position. It's understandable that traders are concerned but my view is that it's going to be relatively short-lived and the backwardation is going to revert to its normal state, which is contango. At the moment, it's good for sellers, not great at all for the buyers — but this will change."

The LME certainly believes that there is no need to interfere in the market. Trading is still continuing, mostly where contracts for tin are only borrowed from its ultimate owner and there are some signs that the mystery buyer may have offloaded—i.e., sold—some of its stock.

Tinplate price negotiations have begun

Global tinplate demand may slightly improve this year, suggests independent market analyst Phil Rogers, but it will stay within the narrow range of 15–16 million metric tons. That's because purchasing of tin-coated steel for food and consumer goods packaging is growing but purchasing for beverage cans is declining.

Around half the world's tinplate now is used in food preservation, and although aluminum is making some inroads into this market, tinplate is likely to retain its market share, says Rogers. One of the biggest canned items is tomatoes. Plastic containers have been found to be too costly, and say some, lack the necessary two-year shelf life.

Pricing also has been difficult to gauge: The pricing of tin plate used in food and aerosol cans and other consumer products' packaging typically is set annually and does not fluctuate with the movement in the price of steel in the spot market. In 2008, tinplate manufacturers increased prices on annual contracts in the U.S., by 11%. In 2009, tinplate prices were increased by another 15% but the prices were reduced in July because of the recession and weakening demand for tinplate and fabricated can stock.

Jay Rembolt, vice president and CFO of consumer products company WD-40 in San Diego, tells analysts in a conference call that "as we got near the middle of our year in the late summer, there had been a continued gap between the underlying cost of steel and tinplate, and there were a number of discussions and negotiations that suggested that price should come down." He says the can manufacturers also felt the price should come down so the mills did cut prices by about 6% in July. Negotiations for 2010 will be concluded in January, he believes.

Another large user already is in negotiations. Timothy J. Donahue, CFO and executive vice president of metal packaging firm Crown Holdings in Philadelphia, tells analysts that suppliers have announced price increases for 2010 "but the outcome is somewhat less than clear." He says that "at this point, we believe there may be no more than a modest upward move or possibly a modest downward move in tinplate prices in 2010."

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