(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, Feb 10 (Reuters) - Tightness has returned to the London tin market.
Actually, it really never went away but the small-volume London Metal Exchange (LME) tin contract is showing every sign of entering one of its periodic spread spasms.
The last one took place in August and September, when nearby spreads went supernova. The benchmark cash-to-threes spread flared out to a whopping $540-per-tonne backwardation at one stage.
That spread closed Wednesday valued at $85 backwardation, the tightest it's been so far this year.
Short position holders are scrambling for the exit and the LME tin price has this week hit a four-month high of $16,045. It is currently vying with zinc for best performer of the base metals pack so far this year.
LOW STOCKS, TIGHT SPREADS
The driver of the tightness is the same this time as it was back in August last year, as shown in the graphic below.
Graphic on tin stocks, spreads and fund positioning:
LME stocks remain chronically low. Open tonnage, which means that not earmarked for physical load-out, stands at just 3,645 tonnes.
The August 2015 trough, which itself was the lowest level since 2008, was 3,535 tonnes.
So you can start to see why shorts aren't hanging around. The LME's latest positioning report, covering the week up to last Friday, showed funds lifting their net long position (LME-SN-MNET) to 1,933 lots from a mid-January low of 933 lots.
The LME report has a built-in long bias when it comes to speculative positioning and it's the change in positioning rather than the outright size that is most pertinent.
Marex Spectron, which publishes its own proprietary take on speculative positioning, reckons funds have gone from net short to a net long equivalent to 2.9 percent of open interest. "This is the biggest long seen in tin since mid-October," according to the LME brokerage.
Either way, it's a moving target as short position holders either close out completely or attempt to roll down the curve.
Pockets of tightness are appearing just about everywhere across the nearby spreads.
"Tom-next", which today is the cost of moving a short position from Thursday to Friday, has on Wednesday morning traded out to $4 backwardation.
Rather, this market appears to be squeezing itself. Again.
Part of the squeeze on physical units is down to Indonesia, the world's largest exporter of the soldering metal.
Shipments have been sliding for several years but the decline accelerated in January with official exports of just 2,486 tonnes, a 63 percent year-on-year fall.
As is often the case in Indonesia, this particular drop-off is in large part due to the government's latest attempt to instill some regulatory discipline on the clutch of miners and smelters operating on the islands of Bangka and Belitung.
Exporters now need explicit permits to ship metal out of the country and, according to tin industry association ITRI, some producers used up their six-monthly permits before they were renewed at the start of this month.
In addition, according to ITRI, the regional governor of the islands has ordered a suspension of offshore tin dredging pending an audit of smelters by Indonesia's Energy and Mineral Resources Ministry.
Overlaying this latest regulatory clampdown has been the disruptive effect of widespread flooding in the area.
The net effect is that Indonesian supply is also going through one of its periodic spasms, which is preventing LME stocks from rebuilding.
WHERE'S THE TIN?
Given the general weakness of demand for all things metallic, it might seem curious there is so little tin around.
In fact, there is a lot of tin around. But it's in the wrong place.
Chinese producers seem to be sitting on high stocks of unsold metal, hence their recent calls for the government to lend a helping hand by buying tin for strategic reserves.
Beijing has so far resisted.
But whatever is sitting in local producers' yards is trapped there by China's 10 percent tax on refined tin exports.
Some metal has in the past seeped out in forms that fall below the customs radar, and therefore don't make it into the headline trade figures, but recent investigations by the Chinese authorities have made it a far riskier proposition.
Nor does there seem to be much interest in parking metal in Shanghai Futures Exchange warehouses. Stocks total a meagre 437 tonnes, reflecting the low level of trading interest in the contract relative to other new ShFE offerings such as nickel.
But whatever the size of the "hidden" inventory in China, it's no use to short position holders on the LME.
And while LME stocks remain so perilously low, the potential exists for a repeat of the extreme spread tightness seen last year.
(Editing by Dale Hudson)