Conclusion: Even as home prices in the United States continue to deflate, various commodities globally are in inflation mode. Specifically, tin is set up bullishly from a fundamental perspective, which will impact the COGS of electronics makers and packaging.
Tin is not a commodity that we have spent a great deal of time focused on over the last couple of years, but with a hat tip from a client we respect and due to the addition of stalwart intern Isaiah DeLeon-Mares who has been digging in on tin recently, we believe we have identified some long-term bullish fundamental dynamics for this commodity. Now we are not so naïve as to suggest that we are early to this story as the price of tin is up more than 50% YTD, but the longer-term supply and demand dynamics are intriguing. As a result, we could be in the early days of a bullish tin cycle.
The primary use of tin is as solder, the fusable metal alloy, which is utilized for making electrical connections. (In 2002, tin replaced lead as the primary component in solders in Europe and Asia, which drove up the demand for tin.) Therefore, the primary end market for tin is the production of electronics, such as cell phones, personal computers, MP3 players, and so on. In North American and Europe, packaging (think tin cans) is one of the key drivers. Asia uses almost twice as much tin as the Americas and Europe combined, and more than 2/3rds of this tin is used in solders for electrical connections. Not surprisingly, China is the largest consumer of tin globally at ~40% of all global tin use. In aggregate, tin is only about a $7BN annual market and roughly 1/20th the size of copper, but remains a critical input into many key consumer products.
Unlike other metals, almost 50% of tin is mined locally by individuals or small scale miners. From a company perspective, the top 10 companies produce about 70% of the world’s tin production and this has remained relatively stable over time. Currently, the United States does not produce any tin and has not produced any meaningful amounts of tin since the late 1980s.
As we look at the tin market, we see three key factors that make us bullishly inclined. These are:
- Inventory is low – As highlighted in the chart below, inventory has fallen off dramatically over the course of the past year on the LME. Currently stocks on the London Metals Exchange for tin are at 13,160 tonnes, which is down almost 50% y-o-y. While tin inventories are slightly off their lows of early October, this dramatic decline in tin inventories signals a current global imbalance in which demand is, and has been, outstripping supply. Specific to this point, PT Timah, the Indonesian state-controlled tin producer and second largest tin producer in the world, reported total tin inventories at the end of September that amounted to only 10,063 tonnes. This was the lowest amount of tin recorded since 2000 by PT Timah. At the peak of the last 10 years, PT Timah had almost 4x that amount of tin inventories. This dramatic and accelerated reduction in global tin inventories is noteworthy.
- Consumption accelerating – According to industry estimates, tin demand in aggregate should be up more than 15% in 2010 versus 2009. Specifically, in 2009 global consumption was ~300,400 tonnes and is expected to be more than 345,000 tonnes this year. The most recent data from the United States, which only accounts for ~10% of global tin demand but a much larger percentage of global imports, support this as consumption of tin in the U.S. was reported to be up 10% in May 2010 over May 2009. (May is the most recent data point provided by the U.S. government.) A key potential future catalyst would be if the U.S. mandated the use of a greater tin percentage use in soldering. As an example, when Asian and Europe implemented a shift from solder with 60% tin to solder with 97.5% tin in 2002, global tin demand jumped 20%.
- Production broadly in decline – Tin production peaked globally in 2005 with 325,000 tonnes and has been in steady decline ever since. This is driven be a number of factors, which include more stringent sanctions restricting mining in key production countries such as Indonesia and China, and broad lack of resources globally. Interestingly, the world’s largest producer of tin, China, is also the largest consumer of tin and recently became a net importer. Despite higher tin prices outside of China, producers are limited as to the amount they can export by the government because of the internal demand requirements. In addition, we did an analysis of the nine largest producers of tin globally and based on their most recent annual numbers, six of those producers are showing declines in production. The decline in production in 2010 is being partially driven by a 1-time event of substantial rain in Indonesia, which the Indonesian government estimates has led to 20% decline in production, or ~20,000 tonnes for the full year.
Currently, it is estimated that the world supply and demand deficit is 17,000 tonnes this year, which will be narrowed by Indonesia coming fully back online. Even when Indonesia does become fully productive again, the long-term supply and demand mismatch will still be sustained absent broad production increasing globally, which seems unlikely based on current trends. Accelerating demand, constrained production, and tight inventories are a good set up for any commodity.
The tin man cometh? Indeed.
Daryl G. Jones