The second half of 2008 brought
with it a total capitulation of industrial metal prices. Gains
accumulated over the preceding three-year bull rally were
surrendered in as many months.
The mass exodus of speculative long position holders in the
third quarter of last year was swiftly followed by a
catastrophic slump in metals demand as the credit meltdown fed
through multiple channels into the real economy.
Amid this general gloom however two metals stand out for not
conforming to the general recessionary pattern. They are the two
smallest contracts in the LME complex -- lead and tin.
THE "ODD COUPLE"
No individual metal was spared the price carnage, as is
shown in the left hand column of the table below, which shows
three-month prices at the closing evaluation of Dec. 31, 2008
together with the percentage decline from the end of 2007.
Dec 31, 2008
Price Pct Chg LME Stocks Pct Chg
Aluminium $1,540 -36.1 103,560 +125.9
Alloy $1,145 -50.4 2,338,300 +151.6
NASAAC $1,125 -51.3 245,020 +126.1
Copper $3,070 -54.0 340,550 +71.2
Lead $999 -60.8 45,150 -0.4
Nickel $11,700 -55.5 78,822 +64.4
Tin $10,700 -34.9 7,765 -36.1
Zinc $1,208 -49.0 253,475 +186.5
The slump in prices was accompanied by sharply rising LME
inventories as surplus metal was delivered to the market of last
resort.
There were, however, two important exceptions to this
pattern. Lead stocks ended the year virtually unchanged, and
down sharply from their mid-year peak of 101,850 tonnes, while
those of tin fell by 36 percent over the course of 2008.
STRUCTURAL PROBLEMS
Neither metal will be immune from the manufacturing
recession that is affecting an ever-growing part of the global
economy, although lead has a significant cushion in the form of
demand from the replacement battery segment.
What both metals have in common, though, is structural
supply-side problems. It is no coincidence that China is a big
producer of both metals and was historically a major exporter of
both metals.
That changed in 2008, partly due to the imposition of export
taxes and partly due to the country becoming the major driver of
global demand growth for both metals.
Exports of tin were just 500 tonnes in the first 11 months
of 2008, compared with over 22,000 tonnes in the same period of
2007. Exports of lead slumped to 32,000 tonnes from 236,000
tonnes over the same timeframe.
These are big changes relative to the size of the two
markets and this loss of supply has been compounded by
production problems outside of China.
In the case of tin, supply from Indonesia, the biggest
non-China producer of the metal, was severely disrupted by the
authorities' clampdown on illegal mining and smelting operations
on the tin-rich Bangka Island.
In the case of lead, the involuntary closure of the Magellan
mine in Australia after a lead-poisoning scare in 2007 has left
a supply-side hole, which has yet to be fully filled.
Both metals needed high prices to persist a while longer to
allow new mines to come onstream. But with neither resisting the
cross-complex collapse in price, not only have new projects been
shelved but existing production is now being severely curtailed.
China's biggest tin producer, Yunnan Tin, has shuttered its
operations and will likely only reopen with the help of the
regional government's "stockpile" plan, a thinly-disguised
subsidy in the form of loan guarantees using metal as
collateral.
In Indonesia the authorities are now cajoling the small
smelters they spent so long trying to close to reopen.
Lead production is suffering from its zinc by-product
status.
As increasing numbers of zinc mines close, so too does an
ever growing percentage of lead production. Even lead-focused
producers such as Doe Run in the United States are struggling
with the dramatic collapse in price. The company shut down one
of its two furnaces late last year and announced a reduction in
mining rates early this month.
FUTURE(S) PROBLEMS
Supply-side problems were the main reason that both metals
ended last year with still-low visible inventory, in very sharp
contrast to all the other LME metals.
That in turn has led to technical tightness in both LME
contracts. Tin is particularly afflicted, the situation not
helped by a dominant long position holding cash positions
totalling more than 90 percent of available LME stocks (as of
close of business Monday).
The cash-to-three-month period has been in triple-digit
backwardation since October, which has drawn some tin into LME
warehouses but not enough to constitute any significant safety
net for unwary shorts.
"Tom-next", the shortest-dated spread in the LME trading
spectrum and the best indicator of cash tightness, was yesterday
trading between level and small backwardation.
Lead, again as of Monday's close, had two dominant long
position holders, one in the 30-40 percentage band and one in
the 50-80 percentage band.
The cash-to-three-month period flipped into backwardation
just before Christmas (on Dec. 23) and although the back has
eased slightly since then, it has not gone away.
The nearby spread structure in both metals is worth paying
close attention to in the coming days and weeks. With stocks so
low and few other "investment" opportunities evident in the
industrial metals complex, lead and tin are the two metals most
likely to attract predators with time and money on their hands.
Since both are LME minnows in volume terms, it seems highly
unlikely that either will break free from the rest of the pack
in terms of three-month price movement. That leaves the nearby
spreads as the likely arena for any tussle between longs and
shorts.
