(Andy Home is a Reuters columnist. The opinions expressed are his own)
By Andy Home
LONDON, Feb 12 (Reuters) - Indonesian tin exports fell sharply last year.
And supply from the world’s largest exporter of the metal is probably going to slide again this year.
Not only is the Indonesian government steadily tightening its grip on what was previously a chaotically free-wheeling independent production sector, but Indonesia’s producers themselves are considering suspending exports due to low prices.
On the London Metal Exchange (LME) benchmark three-month tin has this week hit lows of $17,445 per tonne, a level not visited since August 2012.
Which begs the interesting question of why reduced supply from such an important producer has failed to stem the price decline.
It’s also a question that cuts to the heart of Indonesia’s aggressive resource nationalism, revealing the limitations and dangers of policy over-reach.
Indonesia’s tin exports fell by 17 percent to just under 76,000 tonnes in 2014 from 91,600 tonnes in 2013.
In large part that reflected government policy, specifically a steady tightening of controls on what is exported and how it is exported.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on Indonesian tin exports: link.reuters.com/ruv93w ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Effective September 2013 the authorities stipulated that tin had to meet minimum purity standards and be traded on the local Indonesia Commodity and Derivatives Exchange (ICDX) before it could be exported.
In November last year one of the last remaining loop-holes was closed with a ban on the export of tin in non-ingot form such as billet or solder.
This marks the culmination of a years-long campaign to force the country’s tin sector down the path of value-added production.
In this respect tin has been an early template for broader Indonesian resource policy, echoed in last year’s ban on exports of unprocessed minerals such as nickel ore and bauxite and in the current pressure being applied on copper producers such as Freeport McMoRan to build smelting capacity in the country.
Tin is also a marker for the scale of Indonesian ambitions. The export regulations are intended both to ensure the country’s miners reap the value of being integrated metal producers and of exerting control over the global price of those metals.
This comes in the form of a “suggested opening bid” on the ICDX.
But evidently what is an attempted floor price in all but name hasn’t provided much of a floor.
This is not a problem with demand.
Tin’s usage profile in soldering and packaging does not make for an explosive growth story but the general consensus is that demand right now is faring pretty well.
As analysts at Macquarie Bank note, global shipments of semiconductors, an indicator of tin demand in solder alloys, registered strong growth last year, rising in value to $336 billion from $306 billion in 2013. (Commodities Comment, Feb. 11, 2015).
Rather, the problem for both the tin price and the Indonesian producers is what has been happening on the supply side.
Which has a lot to do with Indonesia’s own aggressive export policy.
China is actually a larger tin producer than Indonesia but it is also the world’s biggest user of the metal and has historically had to import material to fill a domestic supply gap.
And it used to import a lot of tin from Indonesia, often lower-grade material which could then be used as a metallic input by Chinese smelters.
This flow of material has steadily dwindled over the last few years as the Indonesian authorities imposed ever tighter rules on the quality of exported tin.
That should have translated into China lifting its imports of refined tin, which would have been bullish for prices.
But what it actually did was incentivise some Chinese smelters to open up a whole new supply chain in neighbouring Myanmar.
The resulting flow of tin ore first started appearing on China’s import figures around the middle of 2013. Analysts took due note but the consensus was that this was obviously very low-grade material, probably coming from artisanal mining operations and was most likely unsustainable.
Last year, however, such imports from Myanmar almost doubled to 173,000 tonnes. Tin industry body ITRI estimates that was equivalent to around 28,000 tonnes of contained metal.
Not only enough to compensate for the reduction in Indonesian exports but enough to transform China’s own tin sector.
China’s tin smelters, previously constrained by a chronic lack of raw materials, lifted output by 22 percent last year. The notoriously unreliable official figures may overstate the scale of increase but they cannot hide the trend.
And there has been a flow-through effect on China’s tin trade.
Net imports of refined tin have fallen sharply from 30,000 tonnes in 2012 to 8,000 tonnes last year.
But the headline customs figures mask a shadow trade in the export of tin in forms that do not qualify as refined ingot and therefore do not attract China’s 10-percent export tax.
ITRI has already identified shadow exports of more than 6,000 tonnes from other countries’ import figures. This is work in progress and that initial estimate is only likely to be revised upwards.
Their tentative conclusion, however, is that “total metal exports in 2014 might have been more than 9,000 tonnes, making China a net exporter for the first time in seven years.”
Tin’s narrative for many years now has been of a market facing chronic supply problems with not enough new mines to replace older operations.
Indonesia’s own battle with declining grades and attempts, both official and unofficial, to support prices have afforded it a starring role in that narrative.
But Indonesia’s attempt to lever its position as world’s largest exporter to influence pricing has, it seems, backfired.
No-one knew much if anything about tin mining in Myanmar until Chinese smelters started importing raw materials from the country.
Now everyone is scrambling to find out just how much it has and how sustainable is its production.
The answers will determine whether tin’s bull story is simply on hold or will have to be completely rewritten.
One thing is for sure. This is not the way that Indonesia’s tin authorities thought things would play out.
But then markets have an annoying tendency to conform with that age-old law of unintended consequences.
Editing by William Hardy