(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, May 12 (Reuters) - The London Metal Exchange (LME) is running short of tin.
Headline stocks of the soldering metal in the LME's warehouse system fell to 2,290 tonnes this week.
It's the lowest level in at least 20 years but in truth any historical comparison is lost in the mists of time because the world of metals trading and the LME's place in that world were so different back then.
Unsurprisingly, low inventory is once again generating tightness across short-dated time-spreads, extending a pattern that has been running for a couple of years now.
But the outright price is underperforming. Tin, currently trading just shy of $20,000 per tonne, is down more than 5 percent on the start of the year and vying with nickel for worst performer among the major LME metals.
Which begs the question of whether the LME is reflecting the wider state of the market or its own dwindling liquidity.
There is, for example, now more tin sitting in warehouses operated by the Shanghai Futures Exchange (ShFE) than in the LME system.
Graphic on LME and Shanghai Futures Exchange stocks:
The LME tin contract spent much of last year in backwardation, cash metal commanding a scarcity premium over forward dated prices.
After a brief respite in the first quarter of this year, when LME stocks rebuilt to 5,995 tonnes in mid-February, tightness has returned.
The benchmark cash-to-three-months LME spread CMSN0-3 was valued at $71 per tonne backwardation at the Thursday close.
The LME's "tom-next" spread, which is the cost of borrowing metal for a day and which is often a flashpoint for positioning tension, flared out to $19 backwardation on Friday. That's the widest since last October.
This may have something to do with a dominant long position that has been holding between 50 and 80 percent of LME stocks over recent days. <0#LME-WHL>
But LME stocks are so low that it may be nothing more than a passing misalignment of long and short positions. In such a crowded space as the London tin market, it doesn't take much movement for borrowers and lenders to trip over each other.
The curious thing is that right now there is no particular sign of broader physical tightness in the tin market.
Indonesia, the world's largest exporter of tin, is enjoying one of its rare periods of supply regularity.
This time last year, shipments were hit by a double whammy of heavy rain on the tin-producing islands of Bangka and Belitung and another tightening of export regulations by the Indonesian government.
This year, Indonesian shipments have been running smoothly. The official export count was 24,400 tonnes in the first four months of 2017, compared with 16,600 tonnes a year earlier.
China, the other major tin player on the world stage, seems to be in internal destock mode.
Certainly, its call on refined tin from the rest of the world has been subdued in recent months.
Imports totalled just 1,757 tonnes in the first quarter, down from 2,400 tonnes in the first quarter of 2016.
And that despite reduced imports of raw materials from Myanmar, which has emerged as a major supplier to China's tin smelters in recent years.
Tin producer association ITRI estimates that the amount of contained tin flowing in ore from Myanmar to China fell to between 12,000 and 14,000 tonnes in the first quarter from 20,000 tonnes a year earlier.
The quality of the ore has improved, according to ITRI, but the tonnage has fallen as stockpiles in Myanmar's Wa County have been reduced.
Despite declining raw materials supply and reports of periodic smelter shutdowns as Beijing environmental inspectors fan out across the country, there is no sense of scarcity in China.
There are 3,738 tonnes of refined tin registered with the Shanghai market, more than in the LME's global warehouse network.
The very front part of the ShFE contract structure is trading in contango, in stark contrast with the LME contract.
Is the tightness that is becoming hard-wired into the London contract more about the state of the LME tin contract than the wider world?
The broad decline in LME trading volumes has been much discussed and triggered a new consultation process as to how the venerable old dame of global metal trading should position itself going forwards.
But volumes in tin, already one of the least liquid metal contracts traded on the LME, have been falling faster than the rest.
Average daily LME volumes fell by 5.1 percent year-on-year in the January-April period. Tin volumes slumped by 14 percent.
That follows a 31 percent slide in total volumes in 2015 and a 7 percent drop in 2016.
Open interest has also been declining. It totalled 16,152 lots at the end of April, compared with 22,563 lots a year earlier.
It's hard to work out cause and effect in this drop-off in trading activity in London. Lower volumes may simply reflect recent low-volatility, range-bound price action.
Volumes in Shanghai have also dropped over the first part of this year, albeit from a level last year that reflected the broader surge of speculative Chinese money across the domestic commodity exchange spectrum.
But the trend of lower activity in London has been running for more than two years now and the market's evident struggle to attract stocks raises questions as to whether it is losing some of its global draw to Shanghai.
The relationship between the two is likely to be further tested shortly.
It took a much stronger LME cash premium of more than $200 per tonne in the fourth quarter of 2016 to suck in metal and force a stocks rebuild.
With arrivals in the LME system still at subdued levels, it looks as if it will take something similar to help refill depleted LME sheds.
What has changed between then and now, however, is the elimination of China's 10 percent export tax on refined tin.
In theory, if the LME backwardation flares out sufficiently to open an export-friendly arbitrage, Chinese metal should flow to the LME.
What happens in practice will say much as to how the London and Shanghai markets will co-exist now the tariff wall has been removed.
Editing by Dale Hudson