Tin stock squeeze eases, reducing worries of a shortage

* LME tin stocks rise by 700 tonnes after sharp falls

* Benchmark spread deflates after touching highest in 3 yrs

* China well supplied despite worries over Indonesia exports

By Eric Onstad

LONDON, May 2 (Reuters) - A squeeze in tin stocks on the London Metal Exchange (LME) has eased, and benchmark spreads have fallen from three-year highs, dampening worries about supply shortages after major producer Indonesia tightened export policies.

The tightening of tin supply from top exporter Indonesia has coincided with a 40 percent drop in LME stocks since August, and both contributed to a spike last week in LME benchmark spreads.

But additional shipments from Myanmar into China and a rare move by China to export have helped to ease the shortages and also weighed on benchmark futures, which have fallen more than 4 percent over the past week.

"We've had the second increase in LME stocks this week, so the backwardation is attracting some stocks back into the market. That shows that there's material out there," analyst Robin Bhar at Societe Generale (Paris: FR0000130809 - news) in London said.

LME tin stocks (MSNSTX-TOTAL (NYSE: TOT - news) ) have gained about 700 tonnes so far this week to 9,540 tonnes, helping to reverse a spike in spreads.

The premium for cash tin over three-month futures retreated to $45 a tonne from last week's $131 a tonne, the highest since August 2010, prompted by a 43 percent drop in available on-warrant stocks over 10 days in April.

Sharp premiums for cash over forward prices, or backwardations, usually represent supply constraints, but in this case the shortages were more at LME warehouses than in the wider market, analysts said.

The spike in spreads also appeared to have been linked with battles between long and short position-holders in May tin futures, with one big long controlling 20 to 29 percent of open interest and one major short responsible for 30 to 39 percent, according to LME data.

Wider supply worries deepened last year after major producer Indonesia forced domestic smelters to produce higher purity tin before export and also made tin producers trade via a domestic exchange before shipping material for export.

In March, refined tin shipments from Indonesia dropped 37 percent compared with March 2013.

CHINESE EXPORTS

The recent rebound in LME inventories appeared to be coming from China, since most of the build-up in stocks took place in LME warehouses in Johor, Malaysia, which are often used for shipments from China.

"Clearly, availability of prompt material from the LME is pretty tough, so that does open up a potential arbitrage between the Chinese market and the LME market," said Colin Hamilton, head of commodities research at Macquarie in London.

Tin prices in China slipped below LME prices last month for the first time in three years, making exports possible, traders and analysts in Asia had said.

China has not been a net exporter of refined tin since 2008, when it imposed a 10 percent export duty, according to industry group ITRI.

China, the world's top consumer of tin and also a major producer, has been sourcing material from Myanmar following the restrictions imposed by Indonesia.

"China used to buy a lot of tin from Indonesia, and now it's getting more and more semi-processed ore from Myanmar, which has gone through the roof in recent times. China's reliance on international markets has actually come down quite strongly," Hamilton said.

Chinese import data showed that, although its refined tin imports from Indonesia fell 81 percent so far this year, imports of tin ore and concentrates from Myanmar have jumped by 20 percent.

There were other indications that tin availability was not as serious as the sharp drop in LME stocks and widespread forecasts of a market deficit would indicate, metals strategist Stephen Briggs from BNP Paribas (Milan: BNP.MI - news) said.

"Globally after a long period of deficit, the market should be pretty tight, but it doesn't feel that tight now. You're not hearing in the market that (physical) premiums are really tight," he added.

This may be due to stockpiling, causing actual demand to be overstated, he added. (editing by Jane Baird)