LONDON (Reuters) - Chinese tin smelters have announced their intention to cut production in the face of low prices.
The collective statement of intent has had its intended effect, halting a five-month slide in the London Metal Exchange (LME) tin price and triggering a strong bounce from August’s three-year low of $15,565 per tonne to a current $17,300.
Although other industrial metal markets are struggling with a global downturn in manufacturing activity, tin is the first to breach the producer pain threshold.
Low prices, however, are only part of the problem for China’s tin producers. Their other pressing issue is a shortage of raw materials, which may prove to be a structural rather than cyclical problem.
Bulls shouldn’t get too excited, though. There are other producers capable of filling any gap left by the Chinese and weak demand doesn’t bode well for a sustained price rise.
A grouping of 14 Chinese smelters pledged to cut a collective 20,000 tonnes of production this year at an industry meeting in the city of Xian last week.
Yunnan Tin, the world’s largest producer, led the way with a stock exchange filing warning its refined output would drop by around 10% this year.
As ever with such collective announcements by Chinese metals producers, exact details can be a bit hard to pin down.
The International Tin Association (ITA) estimates that national refined tin output had already fallen by 8% over the first seven months of this year, meaning promised cuts may simply reflect what has already taken place.
That doesn’t negate the power of the message sent to short sellers, who had been massing on both the Shanghai and London tin contracts.
LME broker Marex Spectron estimates speculators in the London market slashed their short exposure from 51% of open interest on Aug. 29 to just 14.5% on Sept. 6.
Shanghai bears are also in full retreat, judging by the spike in price and trading activity over the same time-frame.
In terms of market signal, the cutback announcement has already done the trick. For now at least.
Low prices are one part of the trap in which China’s smelters find themselves. The other is an increasingly acute shortage of raw material, which is only partly down to price.
China’s tin production sector has become increasingly reliant on mined concentrates from the Wa region of neighbouring Myanmar in recent years.
Myanmar burst unexpectedly onto the tin market stage around 2013 when China’s customs figures started picking up a growing flow of concentrates moving across the border into China.
China’s imports of Myanmar concentrates surged from 90,000 tonnes (bulk weight) in 2013 to 473,000 tonnes in 2016, more than offsetting a decline in China’s own mine production.
Since then, however, imports have been steadily sliding due to what the ITA claims is a rapid exhaustion both of easily accessible mine reserves and accumulated stocks. Myanmar imports have slumped another 28% so far this year.
Domestic production has also fallen by about 2,000 tonnes due to the closure of Yinman Mining’s Baiyinchagan mine in Inner Mongolia, according to the ITA.
The combined effect is to reduce availability of raw materials to the point that smelter margins are now being severely squeezed.
Smelters had built up stocks of smelting slag as a replacement feed but “this stock has been greatly reduced”, the ITA notes.
The combination of lower domestic production and reduced imports from Myanmar means that “procurement of raw materials is forecast to become even more difficult for Chinese smelters,” it added.
The price reaction to the cutback announcement is perfectly rational since a 20,000-tonne cut would take around 6% of global tin production out of the market.
Moreover, it’s a moot point how China is going to compensate for declining Myanmar concentrate supplies over the medium term, given both increased environmental scrutiny of domestic mines and the current low price environment.
However, another producer, Indonesia’s PT Timah, may be ready to step into any supply breach.
The company had been planning to double production from 33,400 tonnes last year to 70,000 tonnes this year. It has rapidly pedalled back on that target because of the recent price slump.
Production will likely come in around 10,000 tonnes short of the original goal, according to Timah’s company secretary Abdullah Umar Baswedan.
However, it’s clear that PT Timah, already the world’s second largest tin producer, is capable of lifting production significantly thanks to increased domestic ore availability.
That may help mitigate any loss of production in China and places a question mark over how much further the price can rise after its initial reaction to the Chinese announcement.
Also working against any sustained recovery from these price levels are continued warning signs about the state of demand.
Almost half of all tin usage comes from soldering in semiconductors, a sector that is particularly weak even in the context of the broader downturn in global factory activity.
Semiconductor sales slumped 15.5% year-on-year in July, according to the World Semiconductor Trade Statistics organisation.
That extends a dismal trend with the Semiconductor Industry Association noting that first-half 2019 sales were “down across all major regional markets and semiconductor product categories”.
China’s smelters may have had some initial success in halting the slide in tin prices but unless demand starts recovering and soon, they’re going to find it much harder to generate a sustained recovery.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Mark Potter