London Metal Exchange tin has attempted to rebound since the middle of July. The upwardly sloping 20 DMA seems to support prices but the recent wave of selling pressure could destroy the bottoming-out process.
Momentum-based indicators are in positive territory, which could suggest that further upward pressure is due in the immediate term.
A firm break above the 200 DMA is necessary to strengthen the bottoming-out process.
From a technical viewpoint, we maintain our negative technical outlook over a month-horizon but would turn neutral on a 3-month view and slightly positive on a 6-month view.
Macro and micro drivers
LME tin, edging 0.3% lower this morning, is off to a slightly poor start this week although most other base metals experienced stronger downward pressure, with zinc falling 1.3%.
Nearby spreads on the LME remain tight - the cash/three month spread (currently at $75 backwardation per tonne) averaged $93b per tonne last week, up from an average backwardation of $81 per tonne in July. This reflects a strengthening appetite for tin consumption.
The weakness across the base metals reflects a weaker global risk-taking appetite surrounding intensifying trade tensions. Last Friday, in retaliation to US tariffs, on August 3 China threatened to impose tariffs on $60 billion worth of US goods should the US impose the 25% tariff for the second round of Chinese import tariffs ($200 billion worth of goods), announced on August 1.
Last week, LME tin registered a 1.2% decline vs a 1.5% decline for the LMEX because the open interest rose 7% over the period. This means that the tin price weakness was driven by fresh selling, which is indicative of bearish sentiment.
Nevertheless, sentiment in the tin options market seems to have improved of late. The 3-month 25 delta risk reversal, which represents the volatility premium of LME tin call options over put options with a 3-month maturity, increased to 15% on August 3 from 0% in July and -40% at the year-start. This suggests that traders are biased to the upside over the next three months.
The global physical market is slow across the globe. In Europe, premiums dropped slightly at the end of July because market participants were prompted to liquidate some stocks ahead of the summer to avoid a possible widening backwardation in LME spreads. In China, although supply is less abundant than it used to be, factories are shutting down, resulting in weaker trading activity. In the US, physical premiums are likely to remain unchanged until late August on quiet spot business. We expect a pick-up in physical rates after the summer because demand tends to be weaker during the summer months.
Flows in visible inventories
Exchange inventories are up so far in June and so far this year, which implies an absence of tightening in the present fundamentals and corroborates the tin price weakness.
LME tin stocks – at 2,870 tonnes on August 3 – are down 100 tonnes or 3% so far in August after dropping 160 tonnes in July. They are up 635 tonnes or 28% in the year to date after falling 515 tonnes or 40% in 2017.
Shanghai Futures Exchange tin stocks – at 6,801 tonnes as of August 3 – are little changed (-214 tonnes) so far in August after dropping 702 tonnes in July. They are up 1,886 tonnes or 36% in the year to date after they jumped up 2,622 tonnes or 97% in 2017.
The World Bureau of Metal Statistics (WBMS) estimates that the refined tin market was in a small deficit of 414 tonnes in May, bringing the January-May deficit to 4,467 tonnes following a deficit of ~17,000 tonnes in the whole of 2017.
According to the WBMS, global tin supply has contracted remarkably this year. Refined production fell 10,548 tonnes or 7% year on year to 143,810 tonnes in the first five months, after increasing 18,900 tonnes or 5.5% last year. The drop in refined production in January-May 2018 was driven in part by weaker mine production (-20,633 tonnes or -13% year on year, due to large declines in China and Africa).
The resilience of tin prices in the face of escalating trade tensions leads us to believe that sentiment has improved, which is consistent with the positioning in the options market. With supply set to remain stable and demand conditions healthy, we think that the tin market's fundamentals may improve in the second half of 2018, which should result in further drawdowns in exchange inventories and firmer physical premiums. At current price levels, we are slightly bullish on our tin outlook for the remainder of the year.
Trading view: We will close our hypothetical short position in LME tin at the end of the trading day, a position that we built at $20,835 per tonne on March 19. We are on track to make a profit of around 7% on our bearish bet and think that most of the selling pressure is done and as such, see only limited downward pressure from current price levels.
|All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.|