Column: Funds fuel price rally but tin needs investors of a different kind

Forget about copper for just a moment. The real bull star on the London Metal Exchange right now is tin, with year-to-date gains of 41% eclipsing even the red metal’s 33% price rise.

Fund managers have overcome their previous reticence about committing money to such a small, sometimes illiquid market and have accumulated record long positions on the LME tin contract.

Rising speculative interest reflects a growing awareness that tin’s primary use is no longer mundane sardine cans but circuit boards. No tin, no electronics. A metal that defined the Bronze Age is now critical to the coming Internet-of-Things Age.

It is also a market with too much mine production concentrated in too few countries with too much operational risk.

The result is a rolling roulette wheel of supply threats. In the current bull mix is Indonesia’s escalating clampdown on illegal mining and renewed fighting in the tin-rich eastern provinces of the Democratic Republic of Congo.

What this forgotten critical metal really needs is less investment in the market and more in actually getting the stuff out of the ground.

Investment rising

Investment funds have added spice to the recent LME tin price surge above $40,000 per metric ton. Long positions have more than doubled since May to a record 5,753 contracts, equivalent to 28,765 tons of metal.

That doesn’t sound much until you consider that LME stocks, both registered and off-warrant, currently total just over 6,000 tons.

This speculative enthusiasm for tin has been building for a while. Total fund participation in the London market averaged 1,800 contracts in 2020. The year-to-date average is 4,600 contracts.

Tin has clearly been edging onto the broader investment radar, even if it is still a blip next to the likes of copper.

Nor is this solely an LME phenomenon.

Chinese investors are also joining the bull charge, judging by this month’s 60% jump in market open interest on the Shanghai Futures Exchange tin contract.

Risk rising

Tin’s multiple supply challenges reflect a gradual shift in global production over recent years to higher-risk countries such as the Congo and the semi-autonomous Wa State in Myanmar, where the giant Man Maw mine is only slowly returning from a two-year absence.

Include Indonesia’s ongoing crackdown on its black-market operators and fuel shortages in Bolivia and the potential supply disruption covers more than 40% of last year’s actual output, according to the International Tin Association (ITA).

Moreover, existing mines are ageing and grades falling. Smelter utilization rates are under 60% in China and lower still in Indonesia.

Unless things change, a structural supply deficit is “inevitable”, Tom Langston, the ITA’s senior market intelligence analyst, told attendees at the association’s seminar earlier this month.

The London meet was titled “Investing in Tin”, which is very much to the point.

Tin’s problem is not a shortage of metal in the ground. The ITA estimates global resources amount to over 22.5 million tons, enough to supply the market for over 50 years.

And there’s clearly no shortage of smelter capacity available to process more mined concentrate, given the low utilization rates.

It’s the bit in between that is the problem.

Underfunded

Tin may be garnering more speculative attention, but the world’s largest miners haven’t been interested for decades and they still aren’t.

Much of the world’s tin mining industry is state-owned, artisanal or, in the case of Indonesia, a bit of both.

Indeed, artisanal miners have accounted for most of the biggest tin finds in recent years, from Pitinga in Brazil and Man Maw in Myanmar to the Bisie mine in the Congo. They still account for around 40% of global output.

The ITA reckons investment in new tin mines needs to be running around $245 million each year to meet rising demand. The current rate is just $100-150 million.

The single biggest roadblock is funding, with tin failing to generate the same sort of investment surge rolling over other new-age metals such as lithium.

Tin, to quote Langston, needs to see “bullish sentiment in the speculative market translate into new investment” in actual tin mines.

Supply risk premium

Until that happens, this market is going to remain highly volatile as supply threats loom in and out of view on a recurring basis.

The current rally is already in danger of running too far, too fast on speculative froth. Demand is tepid and there is no immediate scarcity of metal.

LME stocks have been rising since July and are now close to year-start levels. Shanghai stocks have also been accumulating in recent weeks and at 7,391 tons are slightly higher than they were at the start of January.

Tin’s new fund friends may be in for a short-term reality check.

But tin’s supply risk premium will remain and the speculative flows will keep returning until longer-term investors step up to the tin challenge.

(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)

(Editing by Mark Potter)