Bullish at the ITRI Tin Conference
- By: John P Sykes
Posted in: Blog, Commodities, Conferences, Mining, Travel
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Greenfields recently spent the week in the junior mining hub of Vancouver. We were there to present the results of a tin mine cost modelling exercise to the board of ITRI, the tin industry body, and to attend ITRI’s International Tin Conference. The conference left us with multiple reasons to be bullish about tin.
Plenty of positives for tin
The conference started with the usual context-setting reports. The first, from CRU Group, provided an overview of the world’s industrial commodities, which we discuss elsewhere. The second by Peter Kettle, ITRI’s tin market guru, set the scene for the rest of the conference, covering the key reasons for being optimistic about tin.
‘V’-shaped recovery
Mr. Kettle started his presentation with a warning about the conference’s joint ability to forecast the future tin price. In April 2008 attendees (like many across the world) failed to see the oncoming financial crisis of late-2008 and forecast an April 2009 tin price (~US$24,700/t) over twice as high as it turned out to be (US$12,200/t). In the dark days of April 2009, attendees underestimated the tin price for April 2010 (US$19,135) by around $3,500 per tonne – a margin of error of about 20%.
Mr. Kettle’s opinion is that tin has surprised on the upside mostly due to a sharper than expected recovery in demand. Contrary to popular belief, more than 50% of the demand for tin is now solder, not tinplate or the “tin cans” many associate with the metal. Of solder demand, about 90% is for use in the electronics sector – one of the major economic ‘supercycles’ of the late 20th and early 21st century. Global electronic equipment production in 2010 is forecast to increase 7.5%, following a 9.9% drop in 2009. Production is forecast to increase 10.3% in the stimulus-driven Chinese economy.
This upturn in demand looks set to bring tin consumption back onto trend. Following the collapse of the Soviet Union in 1991, tin demand rose from just over 200,000 tonnes per year to nearly 350,000 tonnes per year in 2008, a 75% increase in overall demand or 4.4% on an annualised basis. This fell sharply in 2009, down to 2003 levels of around 300,000 tonnes per year. ITRI forecasts that by 2010 demand will rise to 2008 levels just short of 350,000 tonnes, making an almost perfect ‘V’ shaped recovery. From here, ITRI sees demand returning to its previous strong increasing trend, exceeding the 2006 record demand of over 360,000 tonnes in either 2011 or 2012.
Increased investor interest
Until the launch of the molybdenum, cobalt and steel contracts, tin was the smallest contract traded on the LME. The USGS estimates the booming 2008 refined tin market to be worth around US$5.5 billion. The biggest LME markets of copper and aluminium are both worth in excess of US$100 billion. As such, tin has rarely attracted the same investor interest as other base metals, relegated to a paragraph or page at the end of an analyst’s report.
Strong demand growth, increasing prices and the commodities boom have all recently conspired to increase interest in the metal, especially given its close relation to electronics demand and Chinese demand (two big economic supercycles). As followers of copper know, increased investor interest generally means increased prices.
The other attraction of the tin market to investors is its relative small size, which theoretically provides the larger investor with the opportunity to influence the market. In the second half of 2009, hedge fund Ebullio took up large positions on the LME tin market and drove up prices. Many consumers saw this as an effort to corner the tin market. The conference tackled this issue head on, with Ebullio defending their actions and the LME defending their governance of the market. At lunch after the presentation, one miner pointed out that whatever had happened, from their perspective, tin prices went up and they received an unexpected bonus revenue. More evidence that from the miners’ point of view investor interest relates to higher prices.
Sharp structural increases in supply-side costs
Moving to the supply side, Mr. Kettle pointed to several reasons to be bullish about tin prices. Supply has been falling from the world’s second biggest miner, Indonesia, for several years now (an issue Greenfields discussed in great depth following a visit earlier in the year) and with the monsoon season running longer than normal this year, it looks like annual production levels will struggle to match the 2005 peak again. As the government continues to clamp down on illegal tin mining in Indonesia, this trend looks set to continue into the medium term.
The big news for tin bulls came in the presentation’s discussion of long term trends. Mr. Kettle (with a little help from Greenfields) unveiled the first tin mine production cost curve seen widely across the industry for about 20 years. It shows a dramatic shift upwards in both floor and marginal tin costs between 2008 and 2015.
The floor price (the flat middle bit of the curve, representing the minimum price at which most producers can mine tin without widespread loss of capacity) shifts from around US$12,500 per tonne to nearer US$15,000 per tonne during the eight year forecast period.
In the final 5-10% of production, cost jumped from around US$17,500 per tonne to nearer US$25,000 per tonne. Since this marginal production cost represents the price to which long term prices should trend, this is significant, when considering the current tin price is trading in the US$18,000 region.
Two main factors underpin this cost increase. Firstly, the main cost component in developing countries such as Indonesia is diesel fuel, estimated to be up to 50% of the cost of some alluvial mining operations by Mohd Najib Jaafar of Malaysian Smelting Corporation. Alluvial mining operations are therefore vulnerable to the global oil price, a commodity for which most analysts believe the price trend is upwards. Mr. Jaafar estimated that currently alluvial tin miners in SE Asia operate in the US$13,000-US$21,000 range once all costs are considered, making some barely economic even at current prices. As alluvial grades decline in the country, he estimates operating costs may soar over US$25,000 per tonne.
Secondly, hard rock tin mining faces a number of issues. An increasing number of the known hard rock tin deposits in the world are in developed world countries, including the traditional mining countries of Australia and Canada, but also Western European countries such as the UK, Germany and Spain. Tin mining in these countries has been going on for hundreds of years so the deposits that are left are increasingly low grade, small, deep and scattered, increasing both potential operating and capital costs. On top of this factor in the higher taxes, services, labour, fuel and equipment costs typical of these countries, as well as the likely delays to projects in Western Europe, as miners face populations unfamiliar with the mining industry and worried about the value of their countryside property nearby. The total operating costs for many of these operations are likely to be as high or higher than the dramatic estimates for alluvial operations, but with higher capital costs on top.
The end of Congolese conflict tin
A further long term issue in the tin industry that Mr. Kettle pointed to was ‘conflict tin’. Since the end of civil war in 2003 alluvial tin production from the eastern region of the D.R. Congo has increased dramatically in response to rising demand. However, many tin mines in the region along with similar tantalum, tungsten, gold and cobalt operations are run by the militias that perpetrated the acts of war between 1998 and 2003. The majority of their income (and therefore influence) is thought to come from unofficial “taxes” on this mineral production.
In an issue reminiscent of the concern around blood diamonds at the turn of the millennium there is increasing pressure from NGOs on tin end users not to source their tin from ‘conflicted’ mines in the Congo. Legislation is likely to be passed in the USA this year that will force American-based companies to prove they do not source tin from conflicted mines in the Congo. As with blood diamonds the end users will exert pressure down the supply chain to make it both more transparent and more ethical.
The major American tin consumers, such as heavyweights like Intel, are therefore trying to make the tin supply chain more transparent. Both Intel (as head of the Electronics Industry Citizenship Coalition – EICC) and Motorola (as leader of the Global e-Sustainability Institute – GeSI) were at the conference outlining plans they had developed with ITRI to audit the tin supply chain, so end users could prove their tin was not from conflicted mines in the Congo. The EICC and GeSI have already begun auditing the tantalum supply chain.
Such measures are bad news for both illegitimate and legitimate tin miners in the Congo, as the complexity and opacity of supply from this region may stop companies buying from there full stop. From the point of view of miners and potential miners outside of the Congo though, this could be good news. If an effective embargo occurs global tin supply will fall and prices will be driven up. Alternatively, production levels might remain unaffected and two types of tin could emerge – a ‘discount’ potentially-conflicted tin and a ‘premium’ non-conflict tin that has been sourced from outside Central Africa.
A hot future for tin… but don’t get too close too close to the sun
The tin market faces the combination of strong demand and weak supply, that underlies the concept of a ‘hot’ commodity, as described in our article about the CRU commodities climate change forecast, also made at the ITRI conference.
However, the last long term issue raised during Mr. Kettle’s presentation was tin consumer confidence. With forecast prolonged high prices and issues over the amount of tin reserves actually left (an issue we discuss in our report from the Malaysian part of a trip to the SE Asian Tinbelt), consumers will need continued reassurance that tin can be used in their products. Like copper, it looks like the issue of tin demand substitution will dominate future discussion.
Plenty of opportunities for mine project developers
With strong long term fundamentals driving up prices and increased investor appetite there is clearly opportunity for the junior mining sector to both find and fund new tin mines. Indeed, several of the leading contenders were already on display at the conference.
Presentation slide: courtesy of Peter Kettle, ITRI, Global Tin Market Trends & Issues, presented at the ITRI Tin Conference 2010