Supply crunch to propel tin to dizzy heights

LONDON Thu Oct 7, 2010 10:21am BST

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LONDON (Reuters) - Tin's rise in recent days to dizzying heights has been fast and furious and while a correction is thought to be inevitable, scarce supplies mean $30,000 a tonne is likely before too long.

Benchmark tin on the London Metal Exchange has surged by more than 50 percent so far this year to $26,790 a tonne -- a record high for the metal used for soldering in the electronic industry.

Behind the gains are expectations of a growing deficit in the market because of falling supplies from Indonesia, the world's top exporter and second-largest producer after China.

"Prices are now over-extended, so I think we'll have a bit of a correction, but possibly only to $25,000 -- that will now be the floor as we move forward," said Robin Bhar, analyst at Credit Agricole.

"We will see a move towards the $30,000 a tonne level ... Prices are being driven by supply side issues coming up against demand which has been pretty robust."

According to consulting firm ITRI, China's production of refined tin in 2009 was 130,000 tonnes, while Indonesia produced about 62,500 tonnes.

The Association of Indonesia's Tin Industry said the country's monthly tin exports could slip below 7,000 tonnes until March, because of heavy rain and depleting reserves.

That would be a drop of 10 to 15 percent from current monthly levels, the association said.

REAL STORY

A recent Reuters survey showed analysts expect to see a 7,500 tonnes deficit in 2010. Global consumption is estimated at around 365,000 tonnes this year.

"The problem is a lack of new supply to replace output from Indonesia and the (Democratic Republic of) Congo as well," said Stephen Briggs, analyst at BNP Paribas.

"You can expect a correction at some point, but $30,000 a tonne is not out of bounds ... Tin has the best fundamentals of any base metal, even better than copper."

Democratic Republic of Congo has banned mining operations in the country's east in a move aimed at undermining illegal networks fuelling the region's violence, the government said earlier in September.

However on October 1, the DRC's mines minister said he intended to lift the ban within two weeks.

Also on the radar is lower output in China.

"China is obviously seeing output, if not falling, at least not rising in-line with domestic consumption, which is growing strongly," Bhar said.

"China has had to step up imports from the international market, we can see that in the trade data."

Traders noted a large holding -- 30 to 40 percent -- of stock warrants and cash contracts on the London Metal Exchange, but were as yet unconcerned.

"The real story is Indonesia," one said, adding that hedge funds had also climbed onto "the bandwagon".

QUALITY

Many hedge funds have their financial year end in November and that potentially could trigger a large correction in tin prices, another trader said. "They need to take profits so they can collect performance fees."

Analysts also mentioned falling stocks in London Metal Exchange warehouse -- at 12,550 tonnes, down about 55 percent since January and the lowest since May 2009.

Fears of supply shortages are the main reason behind the small premium for cash material over the three-month contract -- at around $3 a tonne on Wednesday compared with a discount above $30 a tonne in early September.

"There is no tin anywhere. Europe is empty of tin, there are some stocks in the Far East, but it's quality that nobody really wants. All the good stuff has already been shipped to Europe," said Lars Steffenson, managing director at Ebullio Capital.

"There is plenty of demand out there, I just don't know where the tin is going to come from, I can see it at $30,000/$40,000 ... You need to destroy some demand."

Steffenson said the dearth of supplies had also pushed physical premiums -- the extra amount buyers have to pay over the LME's cash price -- to around $500 a tonne.

The physical premium in August was $400 a tonne.

(Graphics by Scott Barber; additional reporting by Michael Taylor, Karen Norton, Melanie Burton and Maytaal Angel; editing by Sue Thomas)

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