A looming opportunity in an overlooked metal

By Chris Berry

-A little-regarded, but critical metal has seen its price soar recently

-The Indonesian government has instituted a rule change in the export of the metal which has effectively put upward pressure on the price

At a presentation I delivered at the recent Cambridge House Toronto Resource Conference, I listed out for the audience the energy metals I view most favorably. One in particular raised a few eyebrows and elicited a number of questions as to why.

The rationale

The metal in question has seen a supply deficit for the past four years and is expected to remain in deficit next year as well.
Stocks of the metal at the London Metal Exchange (LME) stand at 13,715 tonnes, the contracts are in backwardation1 , and the backwardation is at its widest point since 2010.

Major producing countries are facing declining ore grades and exhaustion of mine supply.

2012 global mine production stood at 230,000 tonnes.

The metal is ubiquitous in everyday products such as cans and containers, transport, and construction, but is experiencing much stronger growth in personal electronics.

The metal is tin.

Why tin?

Though I mentioned several of tin’s primary uses above, the strong growth in personal electronic devices is the real growth driver. Tin is used as a solder in electronic devices such as computers, which helps connect the circuits on circuit boards and has a melting point lower than the device itself. The typical tablet or smartphone uses between 0.7 to 1 gram of tin in the solder while computers can use between 3 to 5 grams each.

Historically, lead was preferable as a solder based on its lower price, but in 2006 the European Union instituted two directives known as the European Union Waste Electrical and Electronic Equipment Directive (WEEE) and the Restriction of Hazardous Substances Directive (RoHS). Collectively, these directives prohibit the addition of lead to most electronic devices produced in the EU.

Although the absolute amount of tin used is small and varies from one device to the next, if you believe, as I do, that personal electronic devices are going to continue to become more ubiquitous globally, then demand for tin should stay strong at the very least. To the left is a chart from a white paper recently produced by Cisco.

If we assume that “connected devices” and personal electronic devices are one in the same, then the case for increased tin demand starts to become clearer. I don’t mean to overstate the case for tin (or any other energy metal, for that matter), but as society becomes more interconnected and quality of life between East and West continues to converge, the investment case for select metals is very compelling.

What is responsible for the price spike?

Although supply and demand is the ultimate arbiter of an equilibrium price, in the case of tin, it has been the “not so invisible” hand of the Indonesian government which is responsible for the upward price pressure.

On page 100 is the recent price of a tonne of tin on the LME. Earlier this year, the Indonesian government decided to insert itself in the domestic tin market by mandating that tin mined in Indonesia (the world’s second largest producer) be traded domestically before export as well as mandating an increase in the purity. This effectively allows the Indonesian government to generate additional revenue from domestic businesses already involved in the production and export of tin on global markets.

Some analysts are forecasting a tin price of US$28,000 per tonne next year, or $12.70 per pound, up from the current price of $10.38 per pound. This would be a 22% increase.

The sustainability of this recent uptick in the tin price is a key question, but it appears for the intermediate term that higher tin prices are here to stay as the Indonesian government shows no signs of changing course.

According to Bloomberg, exports of raw tin ore will be banned as of January 2014. Indonesian mining companies will need to build and operate smelters to comply going forward. Not surprisingly, this has given Indonesian mining companies pause as they search for clarity from the government. PT Timah, the third largest tin producer in the world2 producing roughly 30,000tpa, has declared force majeure3 on its shipments.

Higher tin prices can certainly render various deposits “economic”, but it will still take money (in the millions of dollars) and time (10 years perhaps?) to advance a deposit from discovery to development to production.

Shown on page 101, though Indonesia is second behind China in tin production, much of what China produces is consumed domestically, so this means end users of tin are perhaps more reliant on Indonesia as a primary source than is first realised.

Mine supply in general appears to be contracting due to increasing costs, declining ore grades and the general challenges of financing a mine, not to mention exploration or development.

The bullish case

Long-time readers of our Morning Notes should be well aware of our view on the commodity complex as quality of life between East and West continues to converge now and in the coming years. Every commodity has its own supply and demand dynamic that should be studied, but you cannot have many millions of people aspire to join the global Middle Class and not expect at least temporary price dislocations (investment opportunities) in these metals or minerals.

The near-term investment case for tin is equally compelling and deserving of more study. To reiterate:

In tin, we have a supply-demand imbalance which is forecast to remain out of equilibrium for at least another year.

Resource nationalism, evidenced by the Indonesian government dictating new rules for tin exports, has sown confusion throughout both the domestic and international tin markets.

Personal electronics promise to become more ubiquitous throughout the world and with federal legislation banning most lead as a solder, tin is a natural substitute (though it does have its drawbacks).

Finally, with no real near-term prospects for increased production a floor should remain under the tin price going forward.

Grades are declining and production is falling in the world’s major tin producing countries. China has allegedly passed “peak tin,” with domestic production having peaked in recent years. It is interesting to note in the USGS statistics above that of the 13 countries listed, tin production either remained flat or fell in 10 countries between 2011 and 2012.

Substitution and recycling of tin end products or a renewed slowdown in global economic growth are threats to be mindful of, but it appears that under the current circumstances, the bullish case for tin is more convincing as recycling of tin has reportedly peaked.

By Chris Berry

Disclaimer: The material herein is for informational purposes only and is not intended to and does not constitute the rendering of investment advice or the solicitation of an offer to buy securities. The foregoing discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (The Act). In particular when used in the preceding discussion the words “plan,” confident that, believe, scheduled, expect, or intend to, and similar conditional expressions are intended to identify forward-looking statements subject to the safe harbor created by the ACT. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward looking statements. Such risks and uncertainties include, but are not limited to future events and financial performance of the company which are inherently uncertain and actual events and / or results may differ materially. In addition we may review investments that are not registered in the U.S. We cannot attest to nor certify the correctness of any information in this note. Please consult your financial advisor and perform your own due diligence before considering any companies mentioned in this informational bulletin.

1 http://en.wikipedia.org/wiki/Normal_backwardation

2 http://www.timah.com/v2/eng/investor-relation/3012052010104031/operational-review/1812052010105512/Performance%20Report/

3 Force majeure is a clause in a contract which effectively suspends the contractual terms due to forces beyond the control of either party.

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