Buy or sell - Mileage for investors in tin?

LONDON Fri Feb 4, 2011 10:47am GMT

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LONDON (Reuters) - Tin prices have hit record highs on worries about short supplies from the top world exporter Indonesia, where rain has hampered production.

Prices of the metal -- used for soldering and in electronic equipment -- on the London Metal Exchange hit an all-time high of $30,920 a tonne on Thursday, a gain of about 15 percent so far this year after a surge of 58 percent last year.

A crackdown on illegal mining in Indonesia since 2006, tighter export regulations in the country and output disruptions have pushed tin prices higher in recent years.

"There are all the ongoing issues surrounding Indonesian production ... the fundamental picture is very sound," said Steve Hardcastle, head of client liaison at Sucden Financial.

"There are currently no obvious substitution possibilities."

Last week a senior official said Indonesia, the world's second-largest producer after China, would restrict annual output to 100,000 tonnes.

One the reason for the sharp upward trajectory in tin prices is the small size of the market relative to other metals.

Annual tin consumption this year is estimated at around 365,000 tonnes, compared with about 21 million tonnes for copper and 45 million tonnes for aluminium, the most frequently traded metal on the London Metal Exchange.

"It's a relatively small market compared with the others, so smaller occurrences could have a bigger effect," said Will Smith, a portfolio manager at CQS New City Investment.

BUY

Lars Steffenson, managing director at Ebullio Capital Management, said tin could vault to $50,000 a tonne.

"There is going to be less and less available. People will have to pay higher prices," he added.

"On the supply side you have output problems, (while) consumption is strong. Its use in electronics has been pretty steady despite the downturn ... there will be a supply deficit."

Part of the reason for the deficit is China, which is said to be consuming more tin than it produces. Its usage last year reached a record level of almost 147,000 tonnes, according to consulting firm ITRI.

A Reuters survey showed analysts expected a deficit of 15,000 tonnes in the tin market this year.

ITRI data showed global tin consumption rose 12.5 percent last year to an estimated 360,300 tonnes.

"Lack of new mine projects is likely to keep supply tight for several years, resulting in a rundown in stocks to very low levels," said Peter Kettle, manager of statistics and market studies at ITRI.

Kettle said he would buy tin as a medium-term investment, over two to three years.

SELL

Exchange open interest or the number of outstanding contracts on LME tin futures has risen to 20,795 lots or 103,975 tonnes from 15,992 or 79,960 tonnes in early September when the latest price surge started..

Many of these contracts are said to be held by commodity trading advisors -- funds that trade on the basis of buy or sell signals from black-box trading models -- and hedge funds that trade on fundamentals.

"There are some people sitting there long who will want to sell at some point, and their sales volumes are not going to be absorbed by the market in one go," Steffenson said.

When those funds start to take profits, tin prices could drop very quickly towards the $25,000 level, traders and fund managers say.

Stocks of tin in London Metal Exchange warehouses at 18,775 tonnes also are up about 50 percent since last October, when they hit 18-month lows of 12,150 tonnes.

"Right now stocks have been rising since October and are more than adequate," Kettle said.

Another potential negative could be tighter monetary policy in the China, the world's largest consumer of industrial metals, as the country tries to rein in growth and inflationary pressures.

"Investors haven't come to terms with the fact that China might have to be more aggressive then it has been so far," said Sean Corrigan, chief investment strategist at Diapason Commodities Management.

(Reporting by Pratima Desai; editing by Jane Baird)

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