love a good squeeze

Squeeze in supply to boost tin price
PUBLISHED: 30 Aug 2013 15:19:00 | UPDATED: 30 Aug 2013 19:19:34

Squeeze in supply to boost tin price
Tin prices are poised to rise as supply is squeezed and demand increases. Photo: Reuters

Sally Rose

A move by Indonesia, which produces about 40 per cent of global tin supplies, to improve the quality of its exports has restricted global supply of the commodity. This, combined with expected growth in demand driven by use of tin solder in electrical circuit boards, means tin prices are poised to rise.

On July 1, the Indonesian government lifted the metal purity required for tin exports from 98.5 per cent to the more exacting quality standard required by the London Metals Exchange of 99.9 per cent. The move is designed to crack down on illegal operators and increase the Indonesian government’s tax revenue.

As was expected, many Indonesian tin smelters have been unable to meet the higher standard. The nation’s exports collapsed, dropping 42 per cent in July compared with the previous month and falling 24 per cent year-on-year.

“Analysts expected the policy would prompt Indonesian tin exports to fall to 8000 tonnes in July but they sunk even further to 6500 tonnes,” CIMB commodities analyst Daniel Hynes said.

Over this period demand has been slightly subdued as economic growth in China, the biggest importer of tin, has slowed. “However sales of circuit boards are now picking up,” Mr Hynes said.

Reduced supply has lifted prices.

In early July the spot price for tin was just under $US20,000 per tonne. It peaked at $US21,400 per tonne on August 12 and on Friday was trading at $US21,400 per tonne.

However, analysts believe these higher prices are below the Indonesian producers marginal costs.

Tin price forecast to rise


Commodity analysts expect the spot price for tin will rise in the medium term.

“Tin has been rated by CRU (Commodities Research Unit Group) on a four-year outlook to be the second best performing metal (behind palladium), and remains one of BNP Paribas’ favourite base metals,” Hartleys resources analyst Mike Millikan said.

CIMB believes tin prices could rise to meet Indonesian tin producers’ marginal cost of production, which it estimates at about $US24,000 per tonne.

Canaccord Genuity has a more conservative outlook for tin prices, based on a lower estimation of the marginal cost of production between $US19,000 and $21,000 per tonne. Canaccord Genuity forecasts the spot price for tin to hit $US19,800 per tonne in 2014 and $US21,000 per tonne in 2015.

“This needs to be understood in the context of an exchange rate forecast of US92¢ for 2014 before reducing to US85¢,” Canaccord Genuity head of Australian mining research Luke Smith said.

Constricting supply


Fifteen Indonesian tin producers in 2011 agreed on a production ban to boost prices. “They haven’t made such an agreement this time, however if prices do not rise soon enough it is expected the Indonesians will further restrict supply intentionally till the price rises above their marginal cost of production,” Mr Hynes said.

In addition, China, which is a net importer of tin but also a producer, has reduced production due to increasing extraction costs.

Yet another factor that could further restrict global supply is that tin miners operating in the Democratic Republic of Congo, which supply large smelters in Thailand and Malaysia, are under pressure to remove conflict tin from the market, Mr Millikan said.

The world’s fourth largest tin producer, Peruvian company Minsur, also has falling production with its flagship winding down in the next few years, Mr Smith said.

ASX-listed tin stocks


Canaccord Genuity’s top pick among Australian tin stocks is Metals X, which has a market capitalisation of $173.5 million.

“Metal X is the only locally listed large-scale commercial producer and is in a very strong position with $75 million in cash and no debt,” Mr Smith said.

On Friday the stock was trading at 10.5¢ per share, having lost about 38 per cent since mid-March. Canaccord Genuity rates Metal X a “buy” with a target price of 18¢ per share.

Hartleys’ top pick of ASX-listed stocks in the tin space is Kasbah Resources. The explorer with a market capitalisation of about $51 million is developing a large resource in Morocco and has secured major Japanese partners in Toyota Tsusho and Nittetsu Mining Company. On Friday the stock was trading at 13¢ per share, having lost about 26 per cent since mid-March. Hartleys recommend it as a “speculative buy” with a 12-month target price of 25¢ per share.

Canaccord Genuity also rates Kasbah a “buy” with a target price of 21¢ per share.

Other tin-exposed stocks listed on the local bourse include Stellar Resources, YTC Resources and Consolidated Tin Mines.