Indonesian pain threshold found, what next for tin?

LONDON: Indonesian tin exports slumped in August to 5,646 tons, the lowest monthly print since January. Cumulative exports of 61,259 tons in the first eight months of this year represented a 10-percent decline from the same period of 2011.
This will come as no surprise to the tin market.
Indonesian producers have made it quite clear that they think the recent international price has been too low and have reacted accordingly.
The last month has seen PT Timah, the country's biggest and most established producer, suspend spot sales, albeit only briefly, while the cluster of smaller operators in the Bangka-Belitung production hub collectively closed up shop at one stage.
The impact on the international market is hard to overstate. Indonesia is the world's largest exporter of the metal used for soldering and tinplate. It has exported between 90,000 and 100,000 tons over the last three years, equivalent to around 25 percent of total global consumption.
As such Indonesia is the key global swing supplier. So its production cost pain threshold is the most obvious floor price for the metal.
And some sort of floor price has been found, it seems.
But determining exactly where it is remains tricky. And what happens next is a trickier question still.
The Indonesian Tin Mining Association has very explicitly stated that the floor price should be around $23,000 per ton.
But is this an aspirational floor price or the real deal?
It is clear that a breach of the $23,000 level almost exactly a year ago was the trigger for the national export ban, which lasted only a little longer than Timah's recent suspension of spot sales but long enough to reduce sharply exports over the September-November 2011 period.
The price needed to drop harder this time around to generate a similar reaction and looking back at the first half of 2010 the price was trading consistently below $20,000 per ton with no discernible impact on Indonesian exports.
Sure, the change in trigger price may reflect no more than the cost inflation that has been running rampant in all the industrial metals.
But there is certainly good reason for thinking that there are in effect two Indonesian pain thresholds.
The first might be termed the political one, the point at which the fractious local producers start to warn about price and their intention to do something about it.
One of the differences between this year and 2011 is the failure of the national export ban to last much longer than it took the ink to dry on the agreement.
Political coherence was damaged and doesn't appear to have been fully repaired yet. Hence the lack of a national response to prices falling below $23,000 this time around.
The harder price floor is almost certainly below $20,000 per ton, although it is sliding rather than fixed.
This is because Indonesia's tin sector is so disparate. At one end of the spectrum lie established producers such as Timah and Koba Tin, both of which probably have higher fixed costs than the “irregular” Bangka-Belitung producers operating at the other end of the spectrum.
These are dependent on local, smaller, lower-cost miners to supply them with feed and are themselves a highly amorphous group of operators.
But remember that the tin price fell close to $17,000 per ton in late July and this seems to be much closer to the hard floor price needed to operate profitably, witness the collective closures in August.
So what happens now?
The LME tin price has already had one short-lived but super-charged rally up to $21,000 at the end of August, largely in reaction to the stream of headlines out of Indonesia.
It is currently trading just shy of $20,000, a level that probably lies half-way between political and hard floor prices for Indonesia's producers.
The graphic above should serve as a warning as to what they will do in a rising price environment.
The drop in exports last year was followed by a December surge to over 15,000 tons as metal held back flooded out into the market.
Given the potential gap between talking about cutting production and actually doing so, there is a strong possibility that something similar may be on the cards over the next couple of months.
That may limit further price upside, particularly given that tin usage is not going to escape the drop in manufacturing activity just about everywhere, most pertinently in China, the world's largest consumer.
Indonesia might well have supported the price on the downside, again, but in all likelihood will not by itself have enough producer discipline to drive the price too much higher.
But will any Indonesian export surge be enough to boost depleted LME stocks, which are the single most obvious bull factor in the market right now?
The monthly drop in Indonesian exports in August amounted to just 2,652 tons. Doesn't sound like much, does it? But it represents more than half the on-warrant tonnage held by LME warehouses.
At 4,675 tons on-warrant tonnage in the LME system is equivalent to just under five days' global usage, a desperately thin level of stocks cover.
There are 6,990 tons of metal sitting in the LME's canceled warrant category. This “should” be a leading indicator of actual stock drawdowns in the period ahead.
Except that tin stocks aren't working that way any more.
With most of that inventory located in just one location, Johor in Malaysia, the relationship between cancelled stocks and actual drawdowns appears to have broken down.
There have been 6,665 tons of cancellations since the start of August. But only 380 tons have actually departed the system. The disparity is explained by the high level of “reverse cancellations” at Johor, where canceled metal is put back onto warrant again.
There seems to be some sort of secondary market evolving in Johor warrants with Chinese arbitrage and warehouse arbitrage in the mix together.
In other words the LME market is tight but maybe not as tight as it might appear on a “normal” way of reading canceled stocks.
That might explain why the nearby spreads are still only hovering either side of level rather than being in the sort of raging backwardation associated with such low headline stock levels.
In theory, the combination of underlying market deficit, painfully low stocks and accelerated imports by China over recent months should make for a compelling bull narrative.
In practice, each one of those components is uncertain.
Deficit has been highly elusive in this market for many months. “Normal” LME stocks patterns appear to be changing. And the flow of metal into China may only be going to invisible stocks build.
The only thing that is certain is that if the price starts heading south again, there will be a lot of headlines coming out of Indonesia...again.

— Andy Home is a Reuters columnist. The opinions expressed are his own.