Indonesian Government Intervention Aggravates Backwardation In Tin Futures

Michael Teague  |

On Wednesday, tin for immediate delivery finished the day $125 higher than the price of contracts for delivery in three months’ time on the London Metal Exchange, the most severe case of backwardation that has been seen since August 2010.

Backwardation is a phenomenon that occurs in futures markets when contracts trade at a higher price the closer they get to expiration. This particular kind of price difference typically occurs when supply is not able to meet demand. This is exactly what’s happening with tin, where a shortfall of supply out of Indonesia, the world’s largest producer of the metal, is sending prices higher.

Indeed, stockpiles of tin dropped the most in 5 weeks on Monday, even as warehouse withdrawal orders jumped nearly 5 percent on Wednesday after last week’s 7-week high, sending prices to their highest level in two weeks. Furthermore, this scenario looks as though it will not be changing for the better anytime soon. According to BNP Paribas, demand will exceed supply in 2014 by some 3,000 tons, for the fifth consecutive year.

The situation has much to do with a stoppage of exports on the part of Indonesian smelters, who are still waiting for the Jakarta Futures Exchange to approve the trading of tin contracts. The Indonesian government implemented rules as of July 1 that increased purity requirements on exports of the metal from 99.85 percent to 99.9 percent, and is now forcing tin to be traded domestically prior to delivery abroad in an effort to both keep track of shipments and increase revenues.

Tin scheduled for delivery in three-months’ time rose 1.5 percent on Wednesday to $21,900 per ton on the LME, while September futures were trading for $40 per ton more than October contracts.

[Image: Indonesian Tin Miners of the Dutch East Indies Company, 1930, Courtesy of Wikimedia Commons]

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