Logistics issues key to annual tin contract negotiations in Europe: 2022 preview
Changing premiums and priorities in European long-term contracts for traders, producers and consumers in the global tin market
Following a year marked by unprecedented global tightness in the tin market, traders, producers and consumers have noted a change in premiums and priorities when settling their European long-term contracts for 2022, Fastmarkets understands.
Spot premiums in the region for standard 99.9% tin ingot, on an in-warehouse Rotterdam basis, touched $2,000 per tonne in June 2021, when the market experienced a crunch in supply as main producers across the world reeled from Covid-19 and logistics issues.
“Consumers finally learned their lesson [in 2020 and 2021] to not just to rely on spot. No one wants to be short again, so there’s certainly good demand for long-term business,” one trader in Europe said.
A big contributor to the tightness in the region was the exponential rise in shipping costs from Asian producing regions, which are said to have remained at around $10,000 per 25ft container since the crunch on shipping lines started earlier in 2021.
All about logistics
“The key issue is to have an understanding about the shipment situation and most people do now,” one Southeast Asian producer source told Fastmarkets.
Most sources in the European market said that, beyond the priority of being able to secure long term tonnages, the main component of the premium for 2022 would be an adjustable addition based on freight costs.
“To be fair to the customers, given that we don’t know how the freight cost is going to move - whether it’s going to get more expensive or more affordable - we’ve offered some customers premiums adjusted on a quarterly basis based on the shipping indices. So, if the trend is going down, we can lower the premium as well,” the producer source said.
“We don’t want to overburden the [customers] with these costs. We don’t want to make the profit out of something that we don’t have a say on,” he added.
A number of traders also confirmed to Fastmarkets that they and their customers had sought out “new structures that allow for these kind of adjustments” when it comes to fixing premiums for 2022 contracts.
“For large contracts, this is better, because we take the risk on the spread, supplies and financing time, but then at least [get to share the] shipping costs on a fair basis,” a second trader in Europe said.
Long-term contract premiums for 2022 have ranged anywhere between $1,000 per tonne to $2,200 per tonne, all with freight adjustments and different payment options, sources told Fastmarkets.
Quotation periods have become increasingly important too, with market participants pushing on one month (M1) and two-months (M2) before shipment quotation periods, to avoid the volatility of tin spreads when contracting material that needs to be shipped from overseas - especially given the cash/three-month spread reached a previously unheard of $4,000-per-tonne backwardation in May.
“We have definitely seen many innovative proposals from the producers and suppliers to get us consumers more comfortable with the higher premiums for the year ahead,” one consumer source said.
And while some forecast that the current crunch on shipping container availability, delays and high costs should start to normalize by mid-2022, no one can be sure.
“In February 2021, I was saying the shipping situation would [soon] improve and producers would be operating closer to normal. The reality is that supply-chain dislocations have persisted for a lot longer than many people anticipated,” Tom Mulqueen, head of research at AMT, said.
“There is still a lot of trepidation in the tin market, particularly around possible further supply constraints in the first quarter [because of] the monsoon season in Southeast Asia and the proliferation of the Covid-19 Omicron-variant. The Chinese market also remains acutely tight,” he added.
Supply uncertainty to remain
Another point of uncertainty that has been a part of long-term contract negotiations is the uncertainty over supplies, particularly for the first half of 2022.
“It is very difficult to forecast the fundamental picture, because it all depends on smelter performance and logistics,” the second trader said.
“I don’t think demand will stay high for the whole year, so the market should be well balanced - unless there is another smelter collapse or private Indonesian tin smelters are not allowed to export,” the trader added.
Independent smelters in Indonesia renew their export licenses on an annual basis, but while in previous years this was done on a regional or local government basis, the central government has recently taken control of the process.
Some sources have indicated that this switch might lead to a more delayed return to normal production for some private Indonesian smelters, which were key players in abating the tightness seen in Europe and the United States in the last quarter of 2021, by releasing more material into the market.
“Indonesian export licenses are due to run out [in December 2021], so those independent smelters will be unwilling to commit material for February, March, April and May, until they can see how much they can offer,” a third trader in Europe said.
Further uncertainty of supply was tied to the fact that the Malaysia Smelting Company is set to remain under force majeure, a number of sources in the tin concentrates and refined tin markets have confirmed – despite MSC’s November announcement that it would be operating as normal before the start of December.
“There are still queues outside of MSC to deliver material, and there is also congestion in all the major [tin] concentrate exporting ports like Mombasa and der Dar es Salaam. The logistics situation will remain very, very tight” a fourth trader in Europe noted.
The issue is likely to have the biggest impact on the US, because the country depends almost entirely on tin imports for its tin needs and faced shipping costs well above $20,000 per container throughout the second half of the year.
“I am worried for the US. I think [it is] going to get into real [trouble] again,” another tin trader said, adding that customers had not yet booked enough under their long-term contracts for 2022 to have enough material.
The quantities that some producers have been willing to offer has also been affected, not so much because of production issues, but because producers “have become a bit more wary about getting into bigger commitments,” the first European trader source said.
Given that a lot of the producers could not meet their sales agreement commitments in 2021 and “probably got a lot of grief from certain clients,” in 2022, and taking into account the continued uncertainty around the new Covid-19 variant and changes in climate patterns, “they would rather only offer certain amounts on long-term [contracts] and would try to sell more on spot,” the trader said.
“So when the market goes crazy again, there will be more scope for them to participate and offer higher numbers. I think there are some producers that would probably feel they have missed out on what happened this year,” he added.
Local producers see increased orders
“European producers have a higher price, for sure, but they will get a lot of inquiries because people are scared of not getting their material next year,” a sixth trader in Europe said.
While local production in Europe limited to only a couple of companies – namely Aurubis (after its acquisition of Metallo) and the recycler Fenix Metals – sources at those companies have noticed an increase in demand for their material.
“While in previous years we maybe struggled to sell all of our production, now we are in the driver’s seat, with people really asking for larger volumes,” one European producer source said.
“Even when we go into the negotiations and they tell us that we are way too expensive, they say ‘you are too expensive, but I need more’ [material],” he added.
Purchasers in Europe have tried to bring down their annual premiums by suggesting two-to-three-year contracts, or pre-payment options, but most have been happy to pay the premiums – which doubled and tripled in 2021 to stand at $400-500 per tonne – to secure tin units.
“A lot of people have asked for more material than we have been able to offer. People are anxious to have material after having realized that the ‘just-in-time’ strategy won’t work anymore,” another source in Europe added.
“We’ve heard of people air-freighting tin [from Asia in the summer because] they just needed tin, and the cost of closing a plant is just too high,” he said, adding that not many would want to find themselves in the same situation again.