Chinese Tin Producers Jump on the Cutback Bandwagon: Andy Home
London. China's main tin producers have joined the cutback bandwagon with an announcement they will curtail 17,000 tonnes of output this year.
As with similar announcements by Chinese producers across the base metals spectrum, there may be more to this apparent self-discipline than meets the eye.
But the cuts, if implemented, will help tighten further a market already facing structural supply issues even before the latest cross-commodities pricing rout.
Proof of that tightness comes in the form of chronically low stocks in London Metal Exchange (LME) warehouses and the resulting persistent stress in nearby time spreads.
A CRY FOR HELP
China is the world's largest tin producer and the nine entities that have pledged to cut output account for around 80 percent of the country's output and 40 percent of global output, according to industry body ITRI.
The 17,000 tonne cutbacks would represent a 12 percent drop from 2015 production levels and are equivalent to 4-5 percent of global output.
But, as with similar coordinated cutbacks announced in other parts of the Chinese metals sector, these ones are in essence a cry for central government help.
The tin market, according to the nine producers, "is detached from fundamentals", for which read, "the current low tin price is not our fault, it's the fault of speculators".
Faced with such market irrationality, the producers have called on the government to help by buying up tin for its strategic reserves.
And that is the real point of this announcement.
The current grand bargain between Beijing and Chinese metal producers seems to be that if you want a government bail-out, you must as an industry commit to closing capacity.
But the clear inference is also that Chinese tin producers are sitting on a lot of unsold stock.
Given the existing constraints on Chinese production from declining domestic mine production, that says much about the poor state of demand in the world's largest user.
Indeed, tin usage is facing its own structural challenge from the miniaturization of solders and demand is estimated to have contracted by a little over three percent last year, according to ITRI.
That has evidently resulted in a domestic market surplus in China, some of which has seeped out to the international market over the last couple of months, albeit in a form that may not make it onto the headline Chinese trade figures.
INDONESIAN EXPORTS STILL FALLING
Ironically, the global market may actually need some of those "grey" Chinese exports.
Because supply from Indonesia, the world's second largest producer but its biggest exporter, continues to decline.
Exports last year fell to 70,154 tonnes from 75,927 tonnes in 2014 based on pre-shipment checks by the country's ministry of trade. It was the third consecutive year of lower exports and the trend is only likely to continue into 2016.
Lower shipments result from a combination of the Indonesian government's incremental clampdown on the cluster of independent producers operating on the island's of Bangka and Belitung and from low prices.
It's noticeable that there has been virtually no trade at all on the local Indonesian Commodity and Derivatives Exchange (ICDX), which operates a de facto floor price mechanism.
The requirement that all exports be traded on the ICDX before departing appears to have been loosened given the fact that metal is still leaving the country despite LME prices languishing near six-year lows.
The lack of trading does, however, point to the price pressures afflicting Indonesian producers, many of which are small, privately-owned affairs.
Elsewhere in the world most other major tin producers have been running to stay still in the face of declining ore grades.
The only significant source of new supply in recent years has been Myanmar and all that country's output has been heading to China to offset declining Chinese mine production.
The upshot of all this is that while tin demand has been contracting, supply has probably been contracting faster.
LOW STOCKS, TIGHT SPREADS
The effects of that dynamic are clear to see on the London market. LME stocks fell by 49 percent, or 5,995 tonnes, last year and at a current 4,890 tonnes open tonnage is low by any historical benchmark.
Nor has much tin found its way into Shanghai Futures Exchange (SHFE) warehouses since the launch of the new contract in March 2015. Total registered tonnage stands at just 696 tonnes.
It's worth noting that LME stocks have remained low despite increasing tension in the nearby spreads, which have flickered in and out of backwardation for several months but without attracting enough metal to allow a meaningful rebuild in exchange inventory.
That spread tension has returned this week with the benchmark cash-to-three-months LME spread closing Thursday valued at $45 per tonne backwardation.
There is quite a lot of market chatter that this reflects the emergence of a dominant long position. It hasn't appeared yet in the LME's positioning reports, which are backdated by two days, but evidently with such low stocks cover, it doesn't have to be a mega position to show up on the LME's radar.
Moreover, the positioning landscape on the next three main monthly prompts looks highly congested even by the standards of the small room that is the London tin market.
Four shorts are facing off against four longs on the February date and one of those longs is a fairly big one, accounting for between 30 and 40 percent of open interest, equivalent to between 2,800 and 3,700 tonnes.
That promises more spread tension ahead and backwardation looks set to remain a feature of the London market until such time as exchange stocks rebuild.
GOOD AND BAD NEWS
In this broader global context China's promised tin production cutbacks are a mixture of good and bad news for the tin price.
The good news is that if they cut by as much as promised, and that may yet be a big "if", it will address the one obvious part of the global supply chain that is characterized by surplus metal.
Because there is little evidence of surplus anywhere else.
And in a world where supply rationing is perceived to be the differentiator between relative price performance, tin is better positioned than just about any other industrial metal.
The bad news is the implication that Chinese producers are sitting on unsold stocks of tin. Why otherwise would they ask the government to start buying it up?
That brings with it the potential for more "grey" exports in the coming months whenever the Shanghai-London arbitrage makes it profitable, as was the case in the fourth quarter of last year.
Stockpiling the stuff in China with government assistance may mitigate the immediate risk of more export seepage but doesn't really address the root causes of low Shanghai prices.
Cutbacks will but it remains to be seen just how hard a bargain Beijing exacts from its tin producers in return for a helping hand.
Reuters
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