The LME tin price tumbled to its lowest since July 2009 at $12,700 per tonne on Monday March 23 before then stabilizing.
Risk sentiment is recovering, with the Shanghai composite index up around 2% at the time of writing. This is in part attributable to even more easing measures from the Federal Reserve yesterday, which seems to have stabilized the market (at least temporarily) and made US President Donal Trump happy with Fed chair Jerome Powell's action.
But signs of successful containment of the virus outside China need to emerge to sustain the risk recovery, we counter.
Tin is the only LME base metal to have broken below its 2016 low, which means it has the weakest posture relative to the other base metals. It fell by roughly 14% last week, its sharpest descent since September 2011 and underperforming the complex. Open interest slumped by 11% over the same period, suggesting that the sell-off was driven by long liquidation. Since this looks like ‘forced’ liquidation by traders considering the abrupt nature of the move, the capitulation may be over.
On the demand side, physical demand remains muted and premiums stable. But with Chinese economic activity seemingly returning to normal, refined demand in the country could improve, boosting premiums in the process. SHFE tin stocks dropped 1,008 tonnes or 17% last week, which is a good sign.
On the supply side, PT Timah in Indonesia - the world's largest tin producer at 76,400 tonnes in 2019 - will cut monthly production by 20-30% due to weaker demand caused by the novel coronavirus (2019-nCoV) outbreak. This week, Minsur in Peru - the world's fourth-largest producer at 19,600 tonnes in 2019 - announced a halt in its operations after the Peruvian government announced a complete quarantine for 15 days on March 15. The ITA estimates that a 15-day quarantine would result in a loss of 800 tonnes of refined tin output. The quarantine could yet be extended, however.
Our model predicts an average LME three-month tin price of $16,120 per tonne in March compared with a month-to-date average of $15,486 per tonne. This suggests that tin prices could move higher from here.
The World Bureau of Metal Statistics (WBMS) estimates the global refined tin market was essentially balanced in 2019. This compares with a deficit of roughly 9,000 tonnes in 2018.
The International Tin Association (ITA), meanwhile, estimates there will have been an 8,500-tonne deficit for the whole of 2019, while Fastmarkets analysts estimate a smaller deficit of 5,000 tonnes for last year.
For 2020, Fastmarkets expects a deficit of 7,000 tonnes - although we could revise it lower due to the economic impact of the 2019-nCoV outbreak. And the ITA forecasts a deficit of slightly below 2,000 tonnes, acknowledging that the market could swing into a surplus should the virus “really start affecting supply chains.”
The disorderly sell-off in LME tin has been driven by forced liquidation amid illiquid trading conditions rather than by a negative change in fundamental dynamics, in our view. We now think that the sell-off has run its course and that tin prices could move higher into the end of the month. We expect firmer tin prices in the second quarter thanks to a deeper deficit underpinned by a rebound in refined tin consumption in China.
We do not have a hypothetical trading position for tin.
All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.