LME says it's watching the market as short squeeze fears grip tin industry

(Bloomberg) - Supply Disruptions from Southeast Asia to Africa. The Rise of Artificial Intelligence. The "Great Bull Market" that dominated the. That potent cocktail puts an oft-neglected metal-tin flour at risk of a short squeeze after prices surged this month.

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Tin on the LME rose sharply in April, reaching 25% in 2024, well ahead of more closely watched commodities such as copper or crude oil.

There are a range of different factors behind the rapid rise in tin prices. Tin supplies in the major producing countries of Indonesia, Minama and the Democratic Republic of Congo are being disrupted, while analysts say demand for electronics is set to expand as the global artificial intelligence boom increases demand for computing power.

But market chatter in recent weeks has centered on the role of a bullish trader that is tightening its grip on LME tin. According to the exchange's standing data, the trader holds at least 40% of long positions in tin for May delivery, and these data do not identify the holders.

This level of concentration has not been seen since 2017, and is comparable to at least 90% of current holdings in LME warehouses. holders of short positions may find themselves in a difficult position as the May carriers approach expiry.

Necessary control measures

"Some market participants see a possible risk of a squeeze," said Ding Wenqiang, a senior analyst at Mysteel.com, one of China's biggest metals research organizations. They are keeping a close eye on the big bull in the May carpet."

Commodity markets, especially illiquid ones like tin, are prone to cyclical short squeezes, in which prices soar as shorts are forced to cash in on losing bets. the great gue that gripped the nickel world in 2022 is a striking example of this.

The LME acknowledged that the tin market was tight and said in an email that it was monitoring the market closely." The LME has put in place the necessary controls to ensure that the market remains orderly," it said, citing limits on nearby spreads, backorder procedures and mechanisms to control volatility.

Microdynamics

Indonesia, the world's largest tin exporter, has seen a decline in tin exports due to delays in the issuance of licenses and a high-profile corruption investigation that has implicated many tin smelter executives and traders. Tin production in war-torn Burma, the world's third-largest tin producer, has also slowed, and tin production in the Democratic Republic of Congo has been disrupted by armed unrest.

On the demand side, the growth of the global artificial intelligence industry is a potential boon for metals used in electronics and electrochemistry. A large number of new data servers and computing systems will be required, which will increase the consumption of tin, which is used for welding.

Read more Artificial Intelligence is a huge consumer of electricity. Awesome Editorial

"Every byte of data and every electron passes through hundreds of welds that hold all the data together," Jeremy Pearce, director of market intelligence and communications at the International Tin Association, said by e-mail. He said that although the tin industry is now in the process of being integrated, it is still a very important part of the process. While estimating demand at this point in time is challenging, the bottom line is that computing and communications systems will need more tin, he said.

So far this year, LME tin stocks have fallen by 47% to 4,045 tons, and the metal's spot price has recently turned into a premium to the three-month futures contract - a combination known as backwardation, suggesting a tight market.

Benchmark tin prices climbed to their highest since June 2022 on Friday, while open positions reached their highest since 2015. Wednesday's price was little changed at $31,810 per ton.

There are clear signs that speculative betting has been increasing, with hedge funds, asset managers and other financial institutions entering the market.

The aggregate net long position held by these financial investors rose to the highest level since the LME began publishing such data in 2018. According to the Exchange's latest Summary of Dealer Commitments, long positions held by these traders, who rarely trade physical tin, now account for 69% of all bullish bets.

The China Factor

In the previously tight tin market, Chinese exports have helped to fill the supply gap and bring the market back into balance. But Mysteel's Ding said that while China's inventories have been increasing and prices have been relatively weak, the discount to the world market has not been large enough to spur exports.

Finally, the LME's recent removal of two Chinese tin smelters from its list of "deliverable" brands has deepened fears of a supply crunch. the LME had said in January it planned to delist the 10% brand due to inconsistencies with the exchange's Responsible Sourcing Principles.

"Earlier this month, the LME's decision to disqualify two Chinese brands from delivery also undermined expectations that Chinese supply would ease the tightness," Ding added.

-Mark Burton and Jack Farchy helped write it.

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