COLUMN-Fundamentals fightback starts with tin: Andy Home

(Andy Home is a Reuters columnist. The opinions expressed are his own)

By Andy Home

LONDON, Sept 30 (Reuters) - Few commodities have soared as high and fallen as hard as tin this year.

The minnow of the LME base metals pack experienced a turbo-charged, early-year rally that culminated in April with an all-time price high of $33,600 per tonne, basis three-month metal .

The subsequent decline has been equally spectacular, with tin last week touching a low of $17,000, a level last seen in June 2010.

It is the story in micro of the entire LME metals complex, albeit with both initial strength and subsequent capitulation accentuated by the LME tin contract's notoriously low liquidity.

The market has staged a partial recovery this week, but the chart picture looks awful -- a screaming "sell" to those that trade off technical signals and momentum.

A previous unanimous analyst consensus that the market was facing an ever deeper supply-demand deficit has been blown away by the broader economic gloom, which has hit cyclical industrial metals particularly hard.

Which is ironic, since that deficit does really seem to be materialising.

Indeed, just as the early-year charge higher caused the deferral of tightness, so too may the recent slump accelerate and deepen it.

DEFICIT DEFERRED

It's worth remembering what went wrong with the bull narrative for tin at the start of the year.

Rather than a deficit leading to high prices, high prices led to a surplus.

LME stocks, which were expected to fall, carried on rising through the first half of this year, peaking in August at a one-year high of 23,425 tonnes.

This unexpected development was compounded by the fact that the cause was initially obscure.

It took some forensic statistical analysis by tin body ITRI to find the explanation -- namely that Chinese smelters were selling off stocks accumulated in 2009 and that the metal was leaving China in a form that didn't make it into the headline export numbers.

That de-stocking exercise prevented the underlying deficit from translating into a market deficit.

Now, the picture looks very different indeed.

LME stocks are still superficially high at 21,350 tonnes. But as of today more than a quarter of that total, 26.5 percent to be precise, has been cancelled in preparation for physical drawdown.

Physical tin premiums have been rising, particularly in Europe , and unlike the situation in other metals such as aluminium and zinc, this trend has nothing to do with large amounts of inventory being tied up in financing deals.

DEFICIT NOW

There are good reasons for thinking that not only will this latent tightness not go away, but also that it could get much more acute, precisely because the price has fallen so far.

First, tin has already seen a direct supply-side response to the price crash.

Smelters in Indonesia, the largest exporter of tin, have agreed to suspend shipments effective from the start of next month in an explicit attempt to prop up prices.

There's undoubtedly some smoke and mirrors involved in this announcement.

Will state-owned Timah really stop shipping metal against term contracts? It seems unlikely.

But the smaller producers clustered on Bangka Island are undoubtedly suffering and in negative margin territory. They have little incentive to carry on losing money with every tonne produced.

So some impact on Indonesian exports seems inevitable, even if it's not the complete moratorium promised by the country's smelters.

Second, China is now back in buying mode after the big de-stocking earlier this year.

Indeed, it is quite conceivable that must-have purchases will be supplemented by opportunistic re-stocking.

It won't happen overnight.

Credit in China is tight thanks to Beijing's continuing battle with inflation. And buyers will not have forgotten that tin prices fell as low as $10,000 in the Great Contraction (Part 1) in 2008.

But Chinese buying interest will only increase on any further price weakness.

Third, the scale and the speed of the price collapse will kill off a mini-surge of fresh exploration activity that accompanied tin's previous bull run.

The lack of fresh mine supply was a core part of the original bull narrative. Few new tin mines have opened in recent years -- a big problem when Indonesian producers are facing a medium-term decline in easily accessible ore.

Not a lot of fresh mines are going to open at current prices either. And that has serious implications for market balance going forwards.

BACK TO THE FUTURE

So does that mean that tin prices are now poised for another stratospheric rebound?

It would be premature to say so.

A further deterioration in either global growth outlook and/or credit market conditions could easily trigger another cross-metals rout. Those 2008 price lows tell us what could happen in the event of another macro shock.

But the combination of supply-side response and potential Chinese bargain-hunting will at the very least act as powerful brakes on further downside momentum.

They may even provide a floor at last week's lows, but tin will struggle to rebuild upwards momentum against a backdrop of broad-based deleveraging and negative technical signals.

Which means that if the current LME stock trends continue, the most likely manifestation of market tightness will be in the front-month spread structure.

The benchmark cash-to-three-months spread CMSN0-3 has shifted from previously healthy contango to small backwardation in super-fast time. As of yesterday's close that spread was valued at $5 per tonne backwardation.

History suggests there is potential for that front-month tightness to get a lot worse, even in a low-price environment.

This is a reassertion of tin's fundamentals. Indeed, just as high prices affected the market's dynamics on the upside, so too will low prices interact with those dynamics on the downside. The process has already started, led by the Indonesian smelters.

The fundamentals' fightback, though, is one that will affect spreads more than outright price. Copper bulls, and for that matter bears, should take note. (editing by Jane Baird)