LONDON (Reuters) - The tin market was last week rudely awakened from its previous range-trading slumber.
On the London Metal Exchange (LME), three-month tin collapsed 7% over the course of Tuesday to $17,585 per tonne, the lowest print since August 2016.
It has since clawed its way back to a current $18,350 but looks susceptible to further selling by technical and momentum funds.
The chart picture looks even worse in Shanghai, where the bear attack was sprung amid a build in short positioning and a spike in trading activity.
Such extreme moves are not unusual in the tiny tin market, where a bit of volume can push prices a long way.
It’s tempting to explain the price collapse through a fundamental prism of rising LME stocks and Chinese exports but, as ever with the tin market, appearances can be highly deceptive.
Indeed, rumbling supply issues may yet bite the Shanghai bears.
The Shanghai Futures Exchange tin contract is a relative newcomer, launched in the first quarter of 2015.
However, activity has been steadily building. Volumes last year were up by 32% and open interest by 10% on 2017 levels.
And both indicators have just spiked again.
Market open interest at the end of last week was 45,580 contracts, the highest level since December 2018. Volumes mushroomed to 348,532 contracts, the third highest weekly total on record.
Taken together with the price break below 142,390 yuan ($20,795) per tonne, the December 2017 low which has defined the bottom of a three-year trading range, all the available evidence suggests a concerted bear attack on a technically vulnerable market.
Where Shanghai led, London has followed.
Superficially, the sudden break-down of the tin price looks to be a response to rising availability.
Chinese exports of refined tin jumped 79% year-on-year to 4,587 tonnes in the first five months of 2019.
It’s the fastest rate of export since the Chinese government quietly got rid of a previous 10% export levy at the start of 2017.
However, the flow of Chinese metal hasn’t happened in isolation but rather in the context of a strong gravitational pull from the London market, which has just experienced one of its periodic squeezes.
This one was particularly acute, the spread between cash and three-month metal flexing out to a $340 backwardation at one stage in May.
Such a hefty cash premium opened the export arbitrage window with the Chinese market. It’s quite possible that some of that flow has found its way onto LME warrant.
The backwardation has also sucked metal onto warrant from the shadow LME warehousing system.
Since March a total 1,820 tonnes of tin have been warranted at the U.S. port of Baltimore, an unlikely destination for any Chinese exports but an obvious one for anyone holding off-market stocks in the country.
LME stocks have rebuilt from less than 1,000 tonnes in April to 6,495 tonnes, the highest they’ve been since June 2016.
That has killed off the squeeze for now, the benchmark cash-to-three month spread flipping back into contango at the end of last month.
The key takeaway, however, is that the squeeze has triggered a redistribution of previously hidden inventory from both Chinese producers and Western financiers to the statistical light of LME storage.
The surge in LME stocks may look bearish but is in reality a reaction to the prior bull play on time-spreads.
Tin’s long-running supply issues, meanwhile, remain unaffected by these spread and stocks gyrations.
Shipments from Indonesia, the world’s largest tin exporter, slipped 2% last year and fell a harder 9% in the first half of this year to 35,661 tonnes.
Indonesia’s export flows have a history of volatility but this year’s decline is noteworthy given the country’s producers had the same LME price incentive to ship stocks as those in China.
China’s ability to destock further, meanwhile, is moot given the steady decline in the amount of tin concentrate available to the country’s smelters from mines in neighbouring Myanmar.
Myanmar’s production surge over the middle of the decade upended the global tin market, opening up a new source of raw materials.
However, that surge now appears to be spent. China’s imports of tin concentrates, most of which come from Myanmar, fell 25% last year and are down again so far this year.
The International Tin Association (ITA) estimates China imported around 18,200 tonnes of contained tin in concentrate from Myanmar in the January-May period, down 33% year-on-year.
Chinese smelters are struggling to adapt to this latest change in supply-chain mechanics. They are using more scrap as a feedstock but this segment of the market is also tightening, according to the ITA.
Refined production is under pressure, dropping 1.3% month-on-month to 13,734 tonnes in May and 10% in the year to date, the Association said.
It’s hard to square such supply-side dynamics with the severity of last week’s price fall.
Even allowing for a subdued demand outlook, this is a market that is struggling with deep-rooted production issues.
A sharp rise in visible stocks may suggest otherwise, but the inflows to the LME warehouse system are all about spread tightness rather than physical surplus.
The Shanghai bear raid appears to have been primarily technical in nature and, judging by the speed of the collapse once support levels were breached, the strategy appears to have worked.
The question now is whether prices can recover from what has in the past proved to be a producer pain point.
If not, a good part of the world’s production is under water at this level, placing further pressure on already strained supply.
It remains to be seen how this plays out, but China’s tin bears may want to book their profits sooner rather than later.
— The opinions expressed here are those of the author, a columnist for Reuters —
($1 = 6.8905 Chinese yuan)
Editing by Jan Harvey