Shorts Scramble in Tin Squeeze on London Metal Exchange

Eric Onstad and Harpreet Bhal

London. Holders of short positions in tin on the London Metal Exchange (LME) scrambled to cover on Wednesday, facing off against a party holding up to 80 percent of combined nearby futures and stocks amid tight availability that may bring further squeezes.
 
It was unclear who was holding the large position. The LME declines to identify clients and several traders said they did not know either.
 
The cost to roll over a short position in the metal, mainly used for solder in the electronics industry, soared to levels not seen since February.
 
“The tin market is a tight one and this [dominant] long has been building for some time,” said a London tin trader. “The market remains tight fundamentally and people are taking a view on that.”  

The big long holder may be a party combining a natural long position to supply metal with speculative futures, traders said.
 
The “tom/next” spread, which represents the cost of rolling over an expiring position to the following day, spiked as high as $25, the most expensive in six months and compared with zero at the end of the day on Tuesday.
 
One party had amassed a combined position of stocks, cash and tomorrow positions totaling 50-80 percent of total inventories, LME data showed.
 
The exchange imposes restrictions when a position surpasses 50 percent and is classified as “dominant” by capping the level the long-holder can charge shorts to roll over positions. Prices are still far below levels where the exchange would intervene.
 
Other data showed several parties made substantial bets on lower prices — four shorts in September futures held positions each accounting for 5-9 percent of the total and one short had a large position of 10-19 percent.  

While the tightness in nearby spreads is due to dissipate as the September contract expires, there is potential for tightness to reappear.
 
“This is not a time to be short of either tin outright or tin spreads in case it boils up again,” a second trader said. “There are significant long positions in the market for October and November and we don’t know to what extent consumers are running short on supplies given the lack of availability of LME unencumbered warrants.”    

Low Stocks  

Inventories of tin registered by the London Metal Exchange have nearly halved over the past year to 11,955 tons.

The amount of metal available for consumers, however, is much lower because much of the stocks have already been cancelled or earmarked for delivery.
 
The amount of stocks due to be taken out of warehouses is 56 percent of the total, leaving only 5,245 tons.
 
Nearly all the tin inventories are in Johor, Malaysia, where there is a bottleneck so consumers have to wait for months to get deliveries of metal.
 
The underlying tightness is among the most severe of the LME base metals.
 
Tin and copper are the only LME metals with forecast market deficits this year and tin is the only one of the six main industrial metals on the LME with a forecast deficit for 2013.      

According to a poll of analysts by Reuters, the tin market is due to have a deficit 4,636 tons this year, with the shortfall trimmed slightly to 4,091 tons in 2013.      

“If you look at its available supply, it is very little, the stockpiles are low, cancelled warrants are high,” said Nic Brown, head of commodities research at Natixis in London.
 
Warrants are ownership documents for inventories.
 
Benchmark three-month tin prices on the LME have shed slightly more than a third since touching a record peak of $33,600 a tonne in April last year and was trading at $21,350 on Wednesday afternoon.
 
“If you get a boost in Chinese economic growth, then tin prices can go up quite sharply. And we wouldn’t be at all surprised to see them starting with a three rather than a two in the not too distant future,” Brown said.

Implied tin demand in top metals consumer China is up 8 percent for the first seven months of the year.
 
Any price rise in three-month futures may be capped by Indonesian producers stepping up sales at higher prices, traders said.
 
Indonesia smelters temporarily halted production last month in an effort to boost weak prices, but last week had resumed operations.  

Shipments of refined tin from Indonesia in August fell to 5,645.87 tons, down 32 percent compared with July.
 
“There will be producer activity above $25,000 so I’m not anticipating that the price is going to run away,” the second trader said.

Reuters