Tin To Average US$22,500/tonne In 2014

Short-Term Outlook

In line with our view, three-month tin has broken above resistance at US$22,500/tonne in recent weeks. While China's economic rebound should lose traction in the coming months and generally drag on industrial metal prices , our core view remains that tin prices will continue to find support at current levels. Supply from Indonesia is likely to trend lower over the near term as a result of new domestic trading regulations .

Core View

Support In Place
Three-Month LME Tin, US$/tonne (Weekly Chart)

Tin To Average US$22,500/tonne In 2014

BMI Tin Forecast
Source: BMI, Bloomberg. Date: October 04, 2013
Spot Short-Term 2013 2014 2015 2016 2017
US$/tonne, avg 22,750 - 22,000 22,500 23,000 24,000 25,000
Bloomberg Consensus - - 22,132 23,047 24,000 23,684 24,253
Support In Place
Three-Month LME Tin, US$/tonne (Weekly Chart)

Short-Term Outlook

In line with our view, three-month tin has broken above resistance at US$22,500/tonne in recent weeks. While China's economic rebound should lose traction in the coming months and generally drag on industrial metal prices , our core view remains that tin prices will continue to find support at current levels. Supply from Indonesia is likely to trend lower over the near term as a result of new domestic trading regulations .

Core View

We forecast tin prices to average US$22,500/tonne in 2014 , placing us firmly below Bloomberg consensus estimate of US$23,047/tonne. With China accounting for 49% of global tin consumption, our below consensus view on China's growth trajectory leaves us cautious towards metals demand ( see 'Another Credit Binge Will Not Cure Economy', September 12 ) . However , the pronounced usage of tin in the electronics sector is cause for optimism. Compared with metals that are tied heavily to the construction industry, demand for tin is less vulnerable to a sharp slowdown in fixed-asset investment in Chin a.

Additionally, a falling stocks-to-use ratio and constrained supply in major tin producing countries will enhance market tightness and push prices higher over our forecast peri od. Indeed, tin production is concentrated in the hands of a few players, with China and Indonesia account ing for 70% of global supply in 2012.

Market Tightness To Drive Price Gains
Global - Tin Production Balance & Stocks-To-Use (RHS)

Production Struggles Here To Stay

We expect the tin market to remain locked in structural deficit over the coming years, with the global stocks-to-use ratio declining from 7.1 % in 2013 to 1.1 % in 2017. Production growth for refined tin will remain subdued, growing at an annual average rate of 2.7 % over our forec ast period. We see little prospects of a turnaround on the horizon, with latest data from WBMS indicating that the global refined tin market is currently stuck in deficit.

In Structural Deficit
Global - Refined Tin Production Balance (tonnes), Output & Consumption Growth

Output growth from major tin producing countries has weakened in recent months, with China and Indonesia posting a 1.6% year-on-year ( y-o-y ) and -21.3% y-o-y growth in July. On the other hand, demand growth in key consuming countries such as China and the US is graduall y strengthening , and has outpaced global production growth in July.

Growth In Output To Lag Consumption
Refined Tin - Production Growth (% chg y-o-y, LHS) & Consumption Growth (% chg y-o-y, RHS)

Crucially, the dour outlook in the mining space is unlikely to brighten anytime soon. While we have recently upgraded our global growth forecast for tin mining to an average rate of 3.8% per annum, from 2.3% previously, the risks to our forecast are slated firmly to the downside ( see 'Tin: Growth Continues, Fuelled By China', October 01 ). Details on mining projects and expansion plans in China are notoriously obscure, and regulatory changes by the Chinese government often have an outsized impact on output growth.

Still Digging, With Risks To Downside
Global - Tin Mine Production

Furthermore, a study by the International Tin Research Institute (ITRI) revealed that the prospects for tin mining are becoming increasingly thin. Tin mined production over the past decade was mainly from previously mothballed mines or discoveries that have been abandoned following the collapse of the tin market in 1985. A limited appetite for mine financing in the current environment reinforces our view that lacklustre project development in the tin industry will fail to pull the market sustainably out of deficit.

Tin Bucking The Trend
Select Metals: Global Stocks-To-Use Ratios, %

Prices To Head Higher

Apart from the thin growth prospects, shipments from Indonesia tend to be price elastic and will continue to be constricted by cartel tactics employed by local producers. The country has on several occasions imposed a ban on exports in order to limit supplies and shore up prices. Hence, we believe any significant downtick in tin prices would be stemmed by price supportive action from the Indonesian government.

We have factored into our forecast the impact of the recent beneficiation law and new trading rules in Indonesia. In a bid to climb up the value chain, the purity level for exports of tin ingots has been raised from 99.85% to 99.9 0 % with effect from July 1, 2013. This notwithstanding, the government is seeking to enhance its role in commodities pricing by steering trade away from London and making it mandatory for all tin exporters to trade on the Indonesia Commodity and Derivatives Exchange (ICDX).

Prices Remain Hostage To Indonesian Policies
Global - Refined Tin Exports By Country (2012)

Tin To Outperform Other Industrial Metals

We expect tin to remain an outperformer in the industrial metals complex. The resilienc e of tin prices will stand in sharp contrast to the prices of other metals such as steel and nickel which will continue to be dragged down by the rebalancing of the Chinese economy. We expect Chinese tin consumption to increase by 4.4% per annum between 2013 and 2017. This will see China becoming increasingly reliant on imports as the country struggles to meet its demand, with the shortfall in domestic output widening from 26 thousand tonnes (kt) in 2013 to 47kt by 2017. Moreover, tin has the most concentrated supply base within the base metals complex and is thus most prone to a supply shock.

Tin Outperformance To Continue
Price Ratio: Tin / S&P GSCI Industrial Metals Index

Risks To Outlook

The risks to our forecast are fairly even. On the upside, supply disruptions from Indonesia due to flooding or further regulatory requirements may trigger major price increases. Additionally, the pullback in mined supply could be greater than we anticipate. Tin miners are finding access to bank loans es pecially tough and long-term hedging is impossible for the metal as contracts only extend 15 months forward on the London Metal Exchange (LME).

Heavy Exposure To Solder Segment
Refined Tin By Application (2011)

On the other hand, tin's declining use in the solder segment might induce downward pressure on prices over the medium term. According to ITRI, the share of tin market driven by solders has declined from a peak of 54% in 2007 to just under 52% in 2011. Apart from cyclical weakness in the global electronics industry, there is a growing trend towards products and assembly techniques involving smaller quantities of solder.

Tin Forecasts
f = BMI forecast. Source: BMI, WBMS
2008 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f
Price (avg) 18,377 13,420 20,441 25,995 21,125 22,000 22,500 23,000 25,000 25,000
Production (kt) 343.4 336.0 356.0 366.5 354.8 357.7 367.2 379.8 393.0 405.1
Consumption (kt) 354.7 325.9 371.1 372.7 359.5 364.5 374.2 385.6 401.3 405.3
Inventories (kt) 32.4 46.1 35.3 29.9 32.7 25.9 18.9 13.1 4.9 4.7
Stocks to Use (%) 9.1 14.1 9.5 8.0 9.1 7.1 5.1 3.4 1.2 1.1
Stocks to Use (wks) 4.8 7.4 4.9 4.2 4.7 3.7 2.6 1.8 0.6 0.6
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