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COLUMN-The great tin wall of China is about to come crashing down: Andy Home
(Repeats June 21 column. The opinions expressed here are those of the author, a columnist for Reuters.)
* China tin trade: http://tmsnrt.rs/2rUu5mv
* LME tin stocks and spreads: http://tmsnrt.rs/2sSZHxK
By Andy Home
LONDON, June 21 (Reuters) - The great tin wall of China is about to come crashing down.
The country is both the world's largest producer and consumer of the packaging and soldering metal.
But its interaction with the rest of the global tin market has in the past been severely constrained by a 10 percent export duty.
Before that tax came into effect at the start of 2008, China had been a net exporter of refined tin. In the period after, it became a net importer, albeit one with steadily diminishing appetite.
The export tax disappeared at the beginning of this year. Don't worry if you didn't notice. Even China's producers didn't see the change coming.
Now (Frankfurt: 11N.F - news) they are starting to react, with Yunnan Tin (Shenzhen: 000960.SZ - news) , China's and the world's largest producer, gearing up to start overseas shipments.
A resumption of Chinese exports will be welcome news to short-position holders on the London Metal Exchange (LME) tin contract, which has for months been starved of stocks liquidity and gripped by persistent tightness.
But might the return of China to the global tin stage herald a more profound shift in how this metal is priced?
Graphic on China's refined tin trade 2004-2017:
DELAYED REACTION
There has been no discernible reaction to the lifting of the export tax at the start of this year.
China's exports of refined tin were a miniscule 232 tonnes over the January-April period.
That's because there was no consultation or advance warning from China's Commerce Ministry.
The only clue that something had changed was the omission of refined tin from the annual list of commodities qualifying for an export tax.
The resounding official silence may be down to the fact that this looks like a preemptive move to avert a potentially embarrassing World Trade Organization complaints process set in motion by the United States last year.
It's taken local producers several months to confirm that the tax is indeed no more.
And now one, Yunnan Tin, is capitalising on its removal by preparing to export tin under a so-called "processing" deal.
What this means is that the company can import raw materials without paying value-added tax as long as they are used to produce metal for export, which of course is now also tax-free.
Yunnan Tin, it is worth noting, is by some margin the world's largest producer with refined output last year of 76,000 tonnes, more than the next three largest producers combined.
It is also a major importer of raw materials from across the border in Myanmar. Such imports totalled 473,000 tonnes last year. That's a bulk weight figure. Industry association ITRI estimates it translates into 50,000 tonnes of contained tin.
RELIEF FOR LONDON MARKET...?
Yunnan Tin's "YT" brand is one of six Chinese producer brands deliverable against the LME's tin contract.
Which desperately needs some fresh stocks liquidity.
LME inventory stands at just 1,730 tonnes, or an even more marginal 1,480 tonnes if metal that has been earmarked for physical load-out is excluded.
Unsurprisingly, the front part of the curve is tight, with cash metal commanding a premium of $120 per tonne over three-month metal as of Tuesday's close.
This backwardated structure has been a near constant in the London tin market for over two years. But that's because stocks have been so low over the same period.
Rebuilds have been relatively small and short-lived and the London market gives every appearance of having to generate a cash premium just to keep any stocks liquidity at all.
Compare and contrast with the Shanghai Futures Exchange (ShFE), which had 4,440 tonnes of tin in its warehouse system at the end of last week.
That's probably symptomatic of broader availability in mainland China, ITRI suggesting there was "some stock" built up in the first quarter of this year.
The association's takeaway is that a renewed flow of metal from China to the rest of the world will cut the current VAT-based price differential between the two markets and, in time, lead to "a rebalancing of pricing, with LME prices falling and China prices rising".
Graphic on LME stocks and spreads: http://tmsnrt.rs/2sSZHxK
...OR A THREAT?
The breaching of the great tin wall of China should have some short-term positives for the London market in terms of stocks liquidity and a consequent dissipation of the tightness that has become almost hard-wired into the LME contract.
But does it also pose a longer-term threat?
The LME tin contract has seen trading activity shrink dramatically over the last couple of years from over 2 million lots in both 2013 and 2014 to 1.4 million last year.
The trend shows no sign of abating, with volumes sliding another 16 percent over the first five months of 2017.
Even (Taiwan OTC: 6436.TWO - news) within the context of the broader decline in LME activity, tin is something of a stand-out.
The London market is largely being kept alive because just enough players still want to use it as a pricing benchmark.
The obvious alternative would be the ShFE but there is still sufficient wariness about what drives Shanghai pricing to prevent any collective switch.
The ShFE tin contract, launched in 2015, has largely escaped the attention of the flash investment crowds that have roiled other mainland commodity markets.
But the ratio of open interest to volume is still low, averaging under 4 percent in January-April, which suggests a significant element of speculative day-trading.
The ratio on the LME contract, by contrast, averaged 17.5 percent over the same period, implying larger positions being held for longer, indicative of more "trade" hedging presence.
The LME's price-reference franchise looks fragile but OK.
For now at least.
But as the market adjusts to the reality of Chinese exports, it will also become ever more Asia-centric.
There is only one European producer brand listed as LME good delivery; that of Belgium's Metallo Chimique. And right now there are no live LME tin stocks outside of Asian locations. The 120 tonnes at Rotterdam have been cancelled prior to drawdown.
London tin, in other words, looks ripe for a serious challenge from another exchange, particularly an Asian one.
The resumption of Chinese tin exports after a near-decade hiatus may herald more than a simple readjustment of London-Shanghai pricing. It threatens a much more profound reconfiguration of global pricing.
(Editing by Dale Hudson)
