COLUMN-Might China spoil Indonesia's tin party?: Andy Home

(Andy Home is a Reuters columnist. The opinions expressed are his own)

By Andy Home

LONDON, Dec 11 (Reuters) - Tin has been the best relative performer of the London Metal Exchange (LME) base metals pack so far this year.

And it's a fair bet that analysts are going to pick it again as a likely out-performer next year when the annual polls are compiled.

Against a backdrop of improving metals demand, relative price performance is increasingly a reflection of each metal's supply dynamics.

Which is why tin's bull credentials are unarguably the strongest of the lot.

THE BULL CASE

This is a market still characterised by structural supply shortfall, unlike, say copper, where heavy investment in new mine capacity is finally closing the gap with demand.

There has been no such investment splurge in tin. Nor is there likely to be any time soon.

The bull case was recently spelt out by Peter Kettle, markets manager for tin industry association ITRI.

The supply-demand deficit in the global tin market is expected to widen from 7,400 tonnes this year to 12,400 tonnes next year, in part reflecting a recovery in the electronics sector, according to ITRI.

No new mines are expected next year. Nor will there be many in the following years. Most viable projects are still 10-12 years from actual production.

Tin mining is simply too niche a proposition to attract mainstream financing, while estimated capital costs for new mines of around $30,000 per tonne will need significantly higher prices than the current $22,500.

And then there is Indonesia.

INDONESIAN STRANGLEHOLD

Indonesia is the largest exporter of tin to the rest of the world, giving it an effective stranglehold on the international market.

It is also a country with some of the most aggressive resource nationalism politics.

While other markets such as nickel, aluminium and copper are fearfully watching the looming January deadline for a ban on exports of unprocessed minerals, the tin market is already living with the consequences of Indonesian policy-making.

Exports of unprocessed tin were banned years ago, part of a decade-long campaign by the government to exert increasing control over its fractured and fractious tin production sector.

The journey down the long and winding value-add road has this year reached its end with the September clamp down on refined metal exports.

******************************************************* Graphic on Indonesian tin exports: http://link.reuters.com/mub45v *******************************************************

Exports have slumped since August due to a new minimum purity standard and a requirement for any exporter to use the new tin contracts on the Indonesian Commodity and Derivatives Exchange (ICDX).

More local players are doing so and both ICDX volumes and thus exports are starting to pick up again from September's low point of 786 tonnes.

But the 5,193 tonnes exported in November is still a long way short of historical norms, while cumulative exports of 78,051 tonnes in the first 11 months of this year were 13 percent, or 12,100 tonnes, off the pace of last year.

Doesn't sound like a lot but in a market as small as tin, it amounts to a big supply hit.

And one that is probably going to get bigger over the next few months before anything like "normal" service is resumed and export flows return to the 8,000-tonne per month levels seen over 2011-2012.

Moreover, the one thing on which all the relevant Indonesian players, from government to producers to exchange officials, agree is that the country should target a higher price for its tin.

CHINA SPOILER

No new supply and the world's largest existing supplier committed to using its position to leverage higher prices is a potent bull cocktail.

The only obvious spoiler of this compelling narrative is China, the world's largest producer and consumer of the soldering and plating metal.

In theory, it should be part of that narrative.

After all, China has been a major importer of Indonesian tin in recent years, often using lower-grade material as an alternative feed stock for its smelters.

Indonesia's clamp-down on exports, both in purity and volume terms, should therefore be bad news for China. And indeed, China's imports from Indonesia have slumped to just 6,000 tonnes so far this year from 15,000 tonnes in calendar 2012.

But there has been no resulting surge in imports of tin from other countries.

In fact there has been no import surge at all. Quite the opposite. China flipped to net exporter in October.

True, it was only to the tune of a highly marginal 347 tonnes. But it was the first time China has been a net exporter of refined metal since June 2007, shortly before a punitive 10-percent export tax was introduced.

Is China destocking, just as the Indonesian supply screw is being tightened?

It wouldn't be the first time that China has spoiled the Indonesian tin party.

A flow of Chinese exports, mostly in a form that didn't make it into the headline trade figures, helped snuff out tin's 2011 bull charge to an all-time high of $33,600 per tonne.

The jury is very much out on whether something similar is happening this time around. The next few months' trade figures will bear close scrutiny.

But at least tin bulls can take some comfort that a Chinese destock will by its very nature be a finite affair.

NEW SUPPLY?

There is, however, another new development in China's trade flows that may have longer-term implications for tin's bull narrative.

The country appears to have found a new source of tin raw materials supply.

Official trade figures show China has imported 58,600 tonnes, presumably of ore given the high figure, from Myanmar so far this year.

Myanmar didn't even appear on last year's trade figures and there is very little information as to what lies behind this sudden import surge.

Nor is there much information on either reserves or the scale of mining activity in Myanmar, although the country is known to host a tin-tungsten mineralisation belt running along the border with Thailand.

As such, it has been something of a "known unknown" in terms of potential tin supply and not a particularly important one given the country's isolation from international trade flows.

Up until now that is.

Squeezed by Indonesia's clamp-down on exports, China is evidently starting to find out a bit more about its small neighbour's potential.

The danger for the Indonesians is that if they try and push prices too hard, they will incentivise Chinese players to invest in one of the few relatively untapped sources of new supply.

Now that really would spoil the bull tin party. (Editing by Anthony Barker)