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COLUMN-Indonesia's tin market grab gains traction: Andy Home

(The author is a Reuters columnist. The opinions expressed are his / her own.)

By Andy Home

LONDON, Oct (KOSDAQ: 039200.KQ - news) 29 (Reuters) - Tin trading volumes on Indonesia's International Commodities and Derivatives Exchange (ICDX) exchange have been accelerating this month.

The new market's fast start reflects the Indonesian government's mandate that all exports of the soldering and plating metal must be traded on a local exchange before leaving the country.

That's a strong incentive for local producers to sign up, although not all have done so yet.

The rising volumes on the ICDX, at any rate, promise some relief for international buyers after exports by the world's largest tin exporter plummeted to multi-year lows in September, when the new rules kicked in.

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For the longer term, one question is whether the exchange sees volumes grow to match previous "normal" export levels and aids Indonesia's attempt to carve out more pricing power for itself.

That may change the global tin market landscape and would not be such good news for the London Metal Exchange (LME), which currently owns the international tin pricing franchise.

VOLUMES GROW

The very first tin trade on the ICDX took place on Aug. 30 this year. Over the course of September total volumes were 795 tonnes, almost exactly matching the actual level of exports last month.

That in itself says much about the tough line being taken by the Indonesian authorities despite vociferous criticism from some local operators and broader concerns that such resource nationalism may prove counter-productive in terms of future investment in the country.

It's also a marker for the looming clamp down on exports of unprocessed minerals due to come into force at the start of next year.

This month's ICDX volumes have grown to 2,735 tonnes through today. Based on September's correlation of ICDX trading and exports, that should give some idea of what to expect in terms of October export volumes.

*********************************************************** Graphic on Indonesian tin exports: http://link.reuters.com/sag34v Graphic on ICDX tin trading: http://link.reuters.com/keg34v ***********************************************************

It's worth noting that the most liquid of the five ICDX contracts has been that for tin with a maximum 300 parts per million of lead.

The Indonesian policy on tin exports as first stated was to prohibit all exports failing to meet the higher purity standard of 100 parts per million of lead.

Relaxing that requirement was a key concession to win over the independent producers operating on the tin-rich islands of Bangka and Belitung. Many simply don't have the technology to hit such purity standards.

Looking at the trading patterns over the last two months, the softening of the purity specification has been critical to the increased activity on the ICDX.

The exchange's two highest-purity contracts, for a maximum lead content of 50 ppm and for "4 Nines" (99.99 percent) tin, have recorded turnover of just 30 tonnes and zero respectively.

DISRUPTION CONTAINED (SO FAR)

Even assuming more activity before the end of the month, October's trading volumes and, therefore, export levels will still be far short of historical norms.

Exports averaged 8,800 tonnes per month in the 12-month period prior to the Aug. 30 rule change.

The drop over September and October combined is likely to amount to some 13,000-14,000 tonnes.

Judging by price and stock developments on the LME, the international market is, so far at least, coping with this loss of supply.

Nearby LME spreads flared out at the start of September when it became clear that this latest Indonesian move was no bluff. The cash-to-three-months period flexed into $125 per tonne backwardation at one stage. Right now, though, it is trading in relatively benign contango, although this being tin, a low-liquidity LME contract, that could change just about any time.

LME stocks have fallen by 1,875 tonnes since the start of September but at 12,900 tonnes they are little changed on the start of the year. Cancelled tonnage, meaning metal that has been earmarked for physical departure, has actually fallen from 4,175 at the start of September to a current 3,160 tonnes.

The inference is that consumers and merchants have drawn down existing off-market stocks to compensate for lower Indonesian availability.

Such stocks were probably built in advance of the September deadline for the new export rules. It's noticeable that exports were running at a particularly fast clip in the first eight months of this year, up 11 percent at 68,000 tonnes.

Moreover, there is an awareness that stocks within Indonesia will have been building, particularly among those local producers who haven't yet signed up for trading on the ICDX.

It's only if the export choke lasts for several months that a more dramatic price reaction is likely to emerge.

WHOSE MARKET?

Developments over the last couple of months should leave no doubt as to Indonesia's ambition to establish an alternative pricing mechanism for the tin market.

There are still plenty of hurdles to overcome, first and foremost getting buy-in from all the local producers and from international tin players.

One faction of the Bangka-Belitung tin producers is still lobbying to set up its own local market, using the Jakarta Futures Exchange.

International buyers, meanwhile, remain largely conspicuous by their absence on the ICDX with the notable exception of Japanese trade house Toyota Tsusho.

But the Indonesian authorities can take some comfort from the increased activity on the ICDX in recent weeks and, assuming they don't blink, the obvious minimum outcome is for volumes to grow to match Indonesian's tin export capacity of around 8,000-9,000 tonnes per month.

At first sight that shouldn't alarm the LME's new owners, Hong Kong Exchanges and Clearing. Over nine million tonnes were traded on the LME tin contract last year and the franchise has a deep history working for it.

But a straight volume comparison is not particularly helpful.

The LME offers a full forward curve with multiple spreads, all of which go towards that headline volume figure. Tin trading on the ICDX, by contrast, is a simplistic cash auction process. A more like-for-like comparison would be the LME's cash volumes, which were 7,500 tonnes last month and 5,005 tonnes this month through last Friday.

Moreover, LME stocks liquidity is already largely concentrated in southeast Asia, attesting to trade flows in the international tin market. There are just 30 registered tonnes in Europe (at Rotterdam) and 110 tonnes in the U.S. (at Baltimore). Everything else is split between Singapore, South Korean and Malaysian locations.

The LME may own the international tin trading franchise, but the distribution of stocks highlights the increasing shift of physical liquidity to the Asian region.

PRODUCER PRICING

What the LME contract has going for it is credibility.

The Indonesian authorities have been explicit in their ambition to achieve higher prices for their tin exports.

This has been a long, long process, beginning with the original attempts to control the fractious independent Bangka-Belitung operators.

Preventing exports of non-processed tin and then tightening the purity rules on metal exports have been important further steps.

Forcing exporters to use a local exchange, creating a rival price reference point to the LME, marks the culmination of the process.

But the aim is unchanged. The Indonesian authorities want higher tin prices and the ICDX is intended ultimately to deliver that goal.

Actually, it's already happening. The ICDX 300 contract has been trading at a steady premium to the LME contract since the middle of this month. *********************************************************** Graphic on LME and ICDX price differential: http://link.reuters.com/hah34v ***********************************************************

That means that it risks being no more than a front for cartel-like pricing by a country which enjoys a strangle-hold on tin supply.

The history of producer pricing, in tin as with other commodities, is not a happy one. The danger is always that producers overplay their hand, generating pricing imbalances that ultimately lead to precisely the opposite outcome than that desired, namely a price collapse.

Right now tin buyers will be hoping for increased volumes on the ICDX because that means more exports.

They may take a more ambivalent stance going forwards, if Indonesia uses its newly-emerging pricing power to attempt artificially to control the tin price. (Editing by Patrick Graham)