-- Andy Home is a Reuters columnist. The opinions expressed are his own --
By Andy Home
LONDON, Feb 11 (Reuters) - Global manufacturing activity is imploding, stocks of surplus metal are rising and LME prices are languishing. Right ? Well, mostly right.
There is one LME contract that does not conform to this general script and it seems to be attracting increasing attention from contrarians looking for a piece of counter-recessionary action.
Tin prices have been sucked down with the rest of the industrial metals complex but LME stocks remain low and cancelled tonnage is rising, pointing to accelerated "out" side activity in the coming days.
Nor is it clear where replacement metal is going to come from in the event that stocks fall back to the ultra-low levels seen last year.
STOCKS PRESSURE
LME stocks of tin fell to a low point of 3,010 tonnes in November last year, causing severe tightness on the front part of the forward curve. The benchmark cash-to-three-months period was valued consistently at over $300 per tonne backwardation in the first half of the month.
The backwardation played its part in sucking metal into the LME system, allowing a rebuild of exchange inventory. Demand weakness and the disappearance of credit, the same drivers ofstocks rises in the other LME metals, were no doubt contributory factors.
As a result LME stocks of tin recovered to 9,200 tonnes in late January. However, that was still equivalent to just 9-10 days of global consumption, well below any stocks-to-price "pinch point".
Since then the stocks trend has turned again. The headline figure fell back to 8,770 tonnes on Tuesday. More ominous has been the accelerated rate of cancellation in the system.
In the five reporting days through Monday a total 1,400 tonnes were cancelled, normally an indicator that metal is about to leave the LME system.
Cancelled tonnage in the system now totals 1,245 tonnes, representing 14.2 percent of the total. This is by a very wide margin the highest ratio of cancelled tonnage of any of the LME metals.
GETTING TIGHTER
Not entirely surprisingly, tightness in the nearby spreads is starting to grow again.
The cash-to-three-months period never quite made it back to contango, even while stocks were rebuilding in January. However, the backwardation shrank to "just" $32.50 per tonne on Feb.2.
As of Tuesday, it was back out at $121, with the tightness concentrated in the second part of the period, i.e. March to the three-month date.
It's probably no coincidence that the LME's future banding reports show clusters of small short position holders on both the March and April prime dates.
Tin's low liquidity deters many fund players but the few CTA technical funds that do get involved are structured short, riding the same downwards momentum that characterised the entire LME complex in the closing months of 2008.
Fund-watchers on the London "street" estimate these black box traders are collectively short to around 30 percent of historical capacity.
A couple of predatory funds are in the opposing camp, having placed long strategies, involving outright three-month prices, spreads and options, at the start of the year.
At the moment the two sides are in an uneasy standoff.
A significant shrinkage of stocks could tip the balance in favour of the longs, which is why the rise in cancelled tonnage is starting to attract attention among London locals.
NO SAFETY CUSHION
Bears are dominant in other metals because rising LME stocks signal growing surplus with producer cutbacks still trailing the devastatingly fast collapse of metals demand.
However, in tin the inverse seems to be true.
The metal will not escape the impact of manufacturing recession, particularly in its key end-use sector. Solder, accounting for just over half of global tin demand, is inextricably linked to the global electronics sector.
However, tinplate, which is the second biggest end-use sector for tin, may actually benefit from recession as consumers shift buying patterns to cheaper canned food and drink.
One beneficiary of this trend is Corus' Trostre tinplating plant in Wales, where planned redundancies and production cuts have been deferred thanks to an unexpected pick-up in demand.
Not spared from the recessionary climate, however, have been the world's tin producers.
Chinese production of refined tin slumped 27.6 percent year-on-year in December, while annual output slid 11.1 percent to 129,544 tonnes.
In Indonesia the government has been encouraging the host of small operators on Bangka Island to reopen after they collectively shut up shop in December due to the combination of rainy season and low international prices.
These are the world's two biggest producers and price-related supply problems are overlaid with political considerations.
Production and exports from Indonesia will this year be determined by a government quota. It hasn't been set yet but the energy and mining industry is already looking to trim its original budget of 100,000 tonnes, citing low prices and weak demand.
Chinese exports have ground to a near standstill since the imposition of a 10 percent export tax at the start of last year. Indeed, China was a net importer to the tune of 12,700 tonnes over calendar 2007.
Even though there is surplus metal in China, it seems likely to disappear into the Yunnan government's stockpile programme.
Yunnan Tin, China's biggest producer, has already indicated it intends to divert 6,000 tonnes to the scheme, while it awaits better local prices.
In short, tin's supply-side is currently highly dysfunctional and complicated by non-market drivers, leaving LME stocks highly exposed to a potential liquidity squeeze.
That, of course, is what attracted the interest of speculative predators on the long side in the first place.
MLX Price at posting:
9.2¢ Sentiment: Buy Disclosure: Held
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