Spot premiums for tin in Europe increased by $20 to $220-240 a tonne basis in warehouse Rotterdam in the past few weeks in line with a rising backwardation on the London Metal Exchange (LME), traders said on Tuesday.
The cash-to threes spread backwardation has quickly gathered pace since the start of the year, flaring to about $80 a tonne from $20 in January. Cash/March was bid at $4 contango, although there is a major short position currently holding in excess of 40 percent of LME futures on the March 17 prompt date.
"The market has stayed tight mainly because of tight supply rather then heavy demand," one physical trader said.
Tin stocks on the LME stood at 12,730 tonnes on Tuesday after dropping 40 tonnes - less than half a record high of 39,475 in August 2002. The LME holds the bulk of its tin stocks, a little less than 10,000 tonnes, in Singapore. About 75 percent of its total stocks are held on warrant, with 2,750 tonnes on cancelled warrant, which denotes metal earmarked for removal.
"Premiums are firmer and firming," another trader said.
"We expect them to rise by $5-10 a month until we get relief from new supply, and although there is more production creeping onto the market, the situation will get tighter until after June."
"The thing is, consumers buy spot compared with the funds who sell three-months, which has helped build the backwardation."
LME three-months futures reached $7,065 on Monday, a high last seen in August 1995 when the market hit $7,310. On Tuesday, it had dipped slightly to $6,940/6,970 from Monday's kerb close of $6,960/980, and traders pegged next resistance at $7,250.
Traders estimated world tin demand to exceed supply by around 16,000 tonnes this year, although they expected the deficit to ease during the second half of the year. Tin is mostly used in plating, food packaging, lead-free soldering and chemicals.
China, the world's biggest tin producer, exported just a fraction of its tin output last year because of shrinking domestic supplies after fatal accidents forced Beijing to shut hundreds of small mines in the past couple of years.
Traders said that producers had increased lower-grade metal production, in particular one major east Asian tin plant, because it was easier, quicker and cheaper to produce.
"Producers are reacting to steep price rises on the LME, and it takes longer to sort out the dredging systems to make higher grades," the second trader said. "Most of the tin production out of Thailand and Indonesia is flexible, although only 20 percent of world demand is currently for 99.85 percent material (lower grade metal accounting for most of LME stocks)."