LONDON: Indonesia's largest tin producer PT Timah is limiting spot sales of the soldering metal in response to a price that is currently floundering around one-year lows.
And if you're experiencing a certain sense of deja vu with that statement, that's perfectly understandable because it did the same almost a year ago, the last time benchmark London Metal Exchange (LME) prices lurched down to the $17,000 per ton level.
The irony is that Timah's suspension of spot sales last year blew apart an agreement with the cluster of smaller producers on the tin-rich Bangka-Belitung islands to prop up the international tin price.
The independent producers seem to have believed that Timah and fellow "establishment" producer PT Koba Tin would, like them, stop all shipments from what is the world's largest tin exporting-country. The stated goal was to hold back metal until the price recovered to $23,000 per ton.
Timah and Koba argued that the agreement didn't cover sales already committed to under term contracts with international buyers. The ensuing row saw the alliance disintegrate within a couple of months amid much acrimony and finger-pointing.
That's not to say that it didn't affect prices, just maybe not in the way that the Indonesian tin producers had envisaged.
The moratorium on shipments was declared at the start of October, Indonesian exports over the following two months totaled just 7,644 tons, less than is normally shipped out of the country in any single month. Indeed, exports fell to a multi-year low of 2,200 tons in November.
With hindsight, it is possible to argue that the export ban, albeit partial, did indeed place a floor underneath the LME price, which recovered to above $23,000 in January this year.
But then a second, unintended effect kicked in.
When the moratorium fell apart, exports surged to over 15,000 tons in December as metal held back over the previous couple of months flooded out of the country.
The impact took a while to become evident.
Tin was the original mineral template for the Indonesian government's current crackdown on the export of unprocessed minerals. As such, what is exported, particularly from the Bangka-Belitung independents, has to be in the form of value-added refined metal.
It's just that the "metal" coming out of Indonesia often doesn't meet international quality standards, meaning it has to be re-refined at other smelters in Asia.
That creates a lag effect. But once the December export surge translated into more units in the international market, it fed through into LME stocks, halting a previous downtrend from February onward.
That in turn capped prices on the upside, the unforeseen flip side to the original price-support ambitions of the country's producers.
Herein lies the conundrum of any producer-led attempt to control prices.
It only works if the price signal is taken as a meaningful reflection of market dynamics.
There's no point in continuing to produce stuff if the market simply doesn't want it.
Output discipline not sales discipline is what really counts.
After all, this is what the current tin price weakness is saying.
Supply in this market, as with copper, is defined by structural shortfall. But structural deficit requires usage growth to translate into palpable market deficit.
And right now tin usage is slowing in tandem with the slowdown in electronic goods output, a function of the broader manufacturing crunch that is gripping much of the world.
For the same reason Indonesia's attempt to wrestle pricing power from the LME looks still-born.
The much-vaunted INATIN physical tin contract launched in February by the Indonesia Commodity and Derivative Exchange (ICDX) has seen volumes evaporate over June and July.
This is superficially down to last year's spat between Timah and Koba on one side and the independents on the other. Bangka-Belitung's smaller players seem to be boycotting the contract on the basis they want the market to be in their region and under their control. But this typically Indonesian politicking is not the point.
It's surely no coincidence that liquidity has vanished just when the international price, as set on the LME, has been falling.
The INATIN contract is today quoted at $20,830 per ton. Why would any buyer of any commodity choose to buy at such a price premium to the international market?
Tin consumers can be thankful that Indonesia's tin producers are as fractious and disorganized as they are.
The country is the key swing supplier of metal to the market. Exports last year were 96,000 tons, accounting for around a quarter of global usage. And with reserves estimated at 800,000 tons Indonesia is going to be a key supplier for the foreseeable future.
As such, Indonesia's producers have more potential pricing power than they themselves probably realize.
But so far internal schisms and collective disorganization have created price disruption rather than price control, mirroring the disruptive impact on export shipments of last year's moratorium.
But the very fact that they tried to form a price-setting alliance in the first place is a sign of some meeting of minds, facilitated by the emergence of a dominant grouping of players in what was once an even more chaotic tin sector.
That may turn out to be a template for other metals that are now coming under the same central government controls on raw materials.
Indonesia is currently in the process of dishing out export licenses to nickel ore and bauxite miners that meet its environmental requirements and that have submitted some sort of plan to beneficiate what are currently raw material exports.
The aim and the likely outcome is to concentrate production in a smaller grouping of established producers, forcing a host of smaller fringe players out of the mining sector.
How long before Indonesia's nickel ore producers, of whom 32 are now licensed, try to exert some pricing power of their own on the supply of what is key input for China's giant nickel pig iron sector?
— Andy Home is a Reuters
columnist. The opinions expressed are his own.
Indonesia tries to control tin price again
