Why tin prices will continue to “solder” on

Tin has been one the year’s best performing metals. Prices are likely to move higher in 2017, thanks to a major ongoing shift in supply and demand.

Tin has been used for thousands of years. In fact, the “bronze” of human civilisation’s “Bronze Age” that began in 3000 BC is an alloy of copper and tin. Today, tin is mostly used as a major ingredient in solder, the alloy that binds metal workpieces together, particularly electronic components.

When tin replaced the more environmentally harmful lead in solder about 10 years ago, global demand for tin surged. Tin solder now accounts for almost half of the world’s tin usage.

Source: Truewealth Publishing Asia

Tin has been the London Metal Exchange’s (LME) second-best performer this year, after zinc. The price of tin is up 47 percent in 2016 so far, and is around two-year highs.

Source: Truewealth Publishing Asia

But prices are still about 35 percent lower than all-time highs reached in April 2011.

Source: Truewealth Publishing Asia

 

The return of Myanmar’s tin…

One of the reasons tin prices are still well off of all-time highs is because of Myanmar. The country formerly known as Burma was closed from the global tin market during decades of military dictatorship. But when the country began opening its doors to the rest of the world about five years ago, it meant tonnes of additional tin ore entered the market.

Myanmar’s tin output has shot up from about zero in 2012, to an expected 50,000 tonnes this year – about 15 percent of global tin ore supply. This makes Myanmar the world’s third-biggest tin producer. Nearly all of Myanmar’s ore goes to China.

Due in part to Myanmar’s additional supply, tin prices fell to a 7-year low by January 2016. But since then, prices have recovered, thanks to what’s happening in Indonesia and China.

 

… offset by what’s happening in the world’s two largest tin producers

Indonesia is the world’s second-largest tin producer and largest tin exporter. But in 2014, the export of certain metal ores was banned, and new metal export rules were introduced. As a result, Indonesia’s tin output dropped by about one-third between 2010 and 2015.

From January through October of this year, Indonesia’s exports continued to fall, to the lowest levels in over a decade, and almost 15 percent below exports during the same period in 2015.

The Association of Indonesia Tin Exporters expects refined tin output for 2016 to drop to 60,000 tonnes, from 67,350 tonnes in 2015.

That would be the lowest level of tin output for the country since 2002. And it could stay at that level for the next few years, according to the International Tin Research Institute (ITRI).

Meanwhile, the world’s biggest tin producer, China, also saw its output decline this year. China accounts for just under half of global tin production.

But environmental inspections in early August forced a number of the country’s tin smelters to shut down. Four smelters, accounting for 18 percent of China’s tin output, were closed through the end of October.

The ITRI projects global tin output will fall from 339,700 tonnes in 2015, to 329,300 tonnes this year, with reduced tin from Indonesia being among the chief factors in the decline.

 

Tin’s supply/demand balance has shifted

For most of this decade, tin supply has exceeded demand. But the supply surplus will shrink to 3,100 tonnes this year (less than 1 percent of 2015 production), from 5,300 tonnes in 2015, according to BMI Research.

That’s in part because global demand for tin increased by a bit more than 4 percent during the first nine months of 2016, according to the World Bureau of Metal Statistics (WBMS).

And thanks to an expected long-term fall in supply and rise in demand, the market is about to flip – there will be more demand than supply. That means prices are likely to go up.

As shown below, in 2017 tin supplies should match demand (that’s why the graph says “0” for 2017). But then from 2018 to 2020, there will be a growing supply deficit – meaning there won’t be enough tin to meet expected demand.

Source: Truewealth Publishing Asia

BMI Research expects this growing deficit to drive up tin prices to an average of US$22,000/tonne by 2020 (up from US$21,400 today). The ITRI suggests that tin prices could rise by over 40 percent from current levels and eclipse US$30,000/ tonne by 2019.

Growth in China’s “apparent demand” (apparent demand = [production + imports] – exports) of 7.3 percent has helped boost global demand. As well as being the world’s biggest tin producer, China is also the biggest consumer. It accounted for 40 percent – or 150,000 tonnes – of global tin consumption last year.

 

Other catalysts for higher tin prices

What’s more, supply from Myanmar has likely peaked. In order to maintain, or increase, production, Myanmar will soon have to extract tin from more expensive underground mines. Rising costs will likely force Myanmar to scale back output next year.

The increase in demand, and the drop in supply, have also caused tin stockpiles to dwindle worldwide. Inventory levels are at their lowest since 2004. And the ITRI believes that if stockpiles continue to fall, prices will go much higher than the current “equilibrium” price of about US$22,500/ tonne.

Source: Truewealth Publishing Asia

Given market forces, low storage levels and increasing demand resulting in a potential tin shortage, the rally in tin prices looks set to continue for some time.

 

Investing in tin

There aren’t many options for individual investors to invest in tin. One of the few choices is to invest in the iPath Bloomberg Tin Subindex Total Return ETN (New York Stock Exchange; ticker: JJT). The fund tracks an index comprised of tin futures contracts – so you don’t own any actual tin, you just get exposure to tin prices.

But it’s a very small ETN – it only has US$3.6 million in assets, and trading volume is low. This means that investors need to be careful so that they don’t wind up paying a much higher price than market price (or selling well below market price).

There is also a tin “mini futures” contract available on the Hong Kong Exchange (HKEX). It replicates most of the major specifications of the LME tin futures contract. But this is for experienced investors with a high risk tolerance only.

Visit Truewealth Publishing Asia's website at http://truewealthpublishing.asia/.

(By Kim Iskyan)

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