How the London tin market sleepwalked into a once-in-a-lifetime spread squeeze [CORRECTED]
Tin market participants say they saw the record-breaking squeeze coming, but in pandemic-time trading, how does it get back to normal?
It was at the beginning of the year when the phones started to ring. Hedge funds, eager to hitch a ride on the steadily rising price of tin, were in the market to buy physical stocks of the valuable metal that is predominately used in electronics.
Solder makers and steel producers, fresh from unsatisfactory annual contract discussions, have been fielding booming orders and hitting up suppliers, only to be told there was little material available.
At the time, cash prices for tin were trading above $20,000 per tonne on the London Metal Exchange, the 144-year-old bourse that has long been the home of price setting and hedging for the world’s producers and industrial users.
Now selling over at $27,850 per tonne, tin’s 35% to-date increase makes it the top performing base metal on the LME this year, as buyers continue to catch up with a chronic squeeze on spreads between futures and cash prices.
In the past month, players looking to roll positions from one day to the next have had to pay up to $600 per tonne for the privilege, but those short the spread between cash tin and the three-month delivery paid up to $5,000 per tonne, an all-time high.
Some involved in the market closely said they saw it coming.
“It’s an often ignored market so people get surprised, but if you’ve been following tin, the writing has been on the wall. Everything was pointing to the market getting tight and tighter,” Robin Bhar, an independent analyst who spent seven years heading metals research for Société Générale, said.
“Tin has always been a volatile market. In recent months, we have witnessed a perfect storm of supply and demand fundamentals,” Michael Cuoco, head of hedge fund sales for metals and bulks at StoneX, said.
Indonesian supply shortfall
Tin supply tanked over the course of 2020, most notably in swing producer Indonesia, which acts as a key supplier to solder makers across Asia and the United States.
Tin smelters aside from Indonesia’s PT Timah largely shrugged off pandemic-related disruptions (Source – International Tin Association)
Production from Indonesian state producer PT Timah, which has the world’s second largest output, dropped by 30,700 tonnes last year to 45,700 tonnes.
Against 2019 figures, that amount would constitute 8.4% of annual refined consumption globally, while production elsewhere among the market’s largest ten producers was largely flat, according to statistics from the International Tin Association.
“Historically, Indonesia’s the biggest source of supply ex-China and exports have been restricted throughout last year,” Tom Mulqueen, an analyst at London brokers Amalgamated Metal Trading, said.
Moreover, Indonesia’s independent smelters, clustered on the islands of Banka and Belitung, have struggled to export material amid the country’s notorious bureaucracy since the start of the year, he added.
Indonesian exports for February totaled 4,395 tonnes, an improvement from January but still down 40% compared with the same month last year.
“I have never seen a bigger deficit of any metal, nor am I aware of any one ever than we are currently seeing in tin,” according to Mark Thompson, chairman of UK mining company Tungsten West and a former chief investment officer at Galena Asset Management.
Rush for physical
Premiums, which are fees paid on top of exchange prices to obtain specific metal in specific locations, have spiked since the start of the year to previously unheard of levels.
This was most pronounced in the US, which is the world’s second largest consumer of the metal at around 30,000 tonnes per year.
Fastmarkets last assessed tin grade A min 99.85% ingot premium, ddp Midwest US at $1,500-1,950 per tonne on March 23, up 91.67% from $800-1,000 per at the start of 2021.
The sharp rise has come after years of relatively low spot volatility, with most of the market securing supply on an annualized basis rather than buying when needed.
“All the traditional demand sectors such as soldering seem to be firing on all cylinders and you’ve got all the promising green-driven prospects, like copper, tin’s probably indispensable for that transition,” Bhar said.
Tin premiums have spiked the world over as end users grapple with disjointed supply chains and an influx of orders
Traders have come under pressure to fill supply gaps, with merchants from Tokyo to New York describing phones ringing daily with orders that they lack the units to fill.
“There is a genuine tightness of physical supply, no doubt of that whatsoever,” according to Laila Zollinger, a director at London tin traders Wildshaw Ltd and Fenix Metals, which produces tin ingots and solder alloys internationally.
“We are getting new enquires from people we haven’t heard from in years,” she said, adding that the company is focused on fulfilling commitments to long-term customers.
End users are not the only ones in the market for tin however, with several sources reporting that hedge funds are acquiring stocks of physical material with the intention of using it as a base for building positions in the derivatives markets.
“I’ve been called by a few of the [commodity trading advisors] trying to get exposed to tin, but had to say sorry, we have nothing left,” a long-time tin trader, who declined to be named, said of the situation.
Tin has been traded on the LME since the 19th century. The contract was suspended in 1985 with the collapse of the international tin cartel before being reinstated in 1989.
Since then, the contract has been no stranger to squeezes. The Southend hedge fund Ebulio Capital Management was infamously said to have captured 90% of LME warrants and cash contracts in 2009, driving out the three-month cash spread to a then-record high of $790 per tonne.
“They kept buying and buying until there was no-one on the other side of the trade,” a source with knowledge of the dealings told Fastmarkets.
But market events of this year have thrown the previous bouts of spread tightness into sharp relief; with one market participant needing to borrow tin for a day via the tom-next (tomorrow/next day) spread at an unprecedented price of $600 per tonne.
The LME’s tom/next spread blew out to a $600 per tonne backwardation on Tuesday February 16th
Spreads have since relaxed somewhat, although the exchange’s three-month cash spread was last in a $2,000-per-tonne backwardation, a figure which dwarfs anything seen prior to the past two months.
Spread volatility between LME tin contracts is not unusual but has reached unprecedented levels since the start of this year
Stocks and the Ring
With the physical market in disarray, several market participants told Fastmarkets that managing positions in volatile times was made more difficult without a physical LME Ring to set prices.
“All the way through, since last year, the fact that the Ring closed has contributed to the lack of spread liquidity across all of the metals, so when you have situations like this in less liquid contracts. It’s an aggregating factor when you don’t have the Ring as a forum to deal with it,” Mulqueen said.
The Exchange has consulted the market as to whether it should close its 144-year-old Ring, which is the last open-outcry trading venue left in Europe and where traders set prices.
With the Covid-19 pandemic making in-person (and high-decibel) deal-making impossible, traded volumes have successfully moved onto the LME’s Select platform.
But several players have lamented the difficulties of doing business through a screen at a time when old-school, in-person deal-making may have helped facilitate spread deals.
“I am not surprised that the tin market has become more volatile recently than ever before. Without the in-person LME rings, the more illiquid markets like lead and tin have greater potential to become disjointed,” Cuoco said.
The LME has increased the monitoring of its tin market contracts since backwardations began to flare up and has the ability to impose a variety of tools to regulate conditions if it sees fit.
“The LME notes current tightness in the tin market. At present, there is no indication that LME pricing has diverged from the underlying physical market,” a spokesperson said.
Volumes on the LME’s cash contract have risen since prices rose (LME via Fastmarkets)
Where to now?
The market has quietened down somewhat since the spikes of early February, in part due to an uptick in stocks delivered to LME warehouses.
A total of 1,495 tonnes of tin are now warranted on the bourse, up from an all-time low of 485 tonnes on February 9.
The vast majority of the inventory (1,325 tonnes) lies in Port Klang, Malaysia. According to brokers, the material is 99.85% purity that was produced by Malaysia Smelting Corporation (MSC), a deliverable quality for the LME but below the 99.9% purity industry standard preferred by the majority of solder makers and produced by most smelters other than MSC.
With physical premiums this high, there remains a disincentive to deliver tonnages onto the exchange, even if it can be used to lend into a steady backwardation.
“For me, there’s no reason to put metal on-warrant. In fact, if I can get my hands on 99.9% warrants, I’ll cancel and deliver to my customers,” a tin producer told Fastmarkets.
After hitting record lows in February, warranted tin on the LME has since been on the up
Some market members are hopeful that a potential reopening of the LME’s Ring will help unwind the current tight spreads.
“The Ring would bring the main market makers together in the same location. That does a lot because the brokers are better able to ascertain who has what and make the needed markets,” Cuoco said.
Others see the old markets adage of higher prices being the best “cure” for high prices panning out, with alluvial miners incentivized to bring on more production.
“My personal view is it has to go to a price where demand is destroyed, because supply isn’t there and because demand is so inelastic,” Thompson said, citing an expectation that the cash price could be driven above $50,000 per tonne within the next 18 months.
Whether that pans out remains to be seen, but with pandemic-era trading dominating markets in 2021 it’s unlikely we’ll see a commodity with more action than tin.
[Editor’s note: An earlier version of this article suggested that tin was new to the LME as of 1989. It was in fact one of the original metals traded on the exchange but went through a hiatus from 1985-1989 after the collapse of the international tin cartel. The story also erroneously stated that the all-time low of warranted LME tin stocks was 100 tonnes on February 18, while it was in fact 485 tonnes on February 9. Additionally, StoneX was misidentified as StoeneX in the ninth paragraph.]