China's tin smelters slash output, but metal's downward trend will continue

Major tin smelters in China will scale back output to weather falling prices, but that may not be enough to reverse the metal's downward trend for the next one to two years.

The two-year bull run for tin has come to an end. Prices for tin, which is mainly used in electronic soldering, reached record-high levels in early March, benefiting from the constrained supply and surging demand for consumer electronics and household appliances during the COVID-19 pandemic. However, the commodity has since experienced a steeper correction than other industrial metals, with a more than 20% decline since May 1, as Indonesia's production and exports recovered and investors grew increasingly concerned about weakening consumer demand amid inflationary pressures.

Smelters in China, the world's biggest tin market, are struggling to deal with a sharp drop in prices. Most of them had pocketed money from the elevated tin prices in the past two years and did not hedge tin ore and concentrate. The recent sharp decline in tin prices forces them to sell refined tin products at prices much lower than feedstock.

"China's smelters are almost signaling how weak the market is over there," Tom Mulqueen, head of research at Amalgamated Metal Trading, said in an interview.

Chinese tin producers, which account for more than 70% of the country's refined tin production capacity, have announced production cuts, according to consultancy Shanghai Metals Market, or SMM. Yunnan Tin Co. Ltd., the world's largest tin producer, halted smelting operations for 45 to 50 days for maintenance starting June 16, the company said June 14.

The output cut could slow down the tin price decline, but it will not reverse the longer-term downside trend, Li Daisheng, a base metal analyst at SMM, told S&P Global Commodity Insights in an interview.

Question mark over supply impact

If all Chinese smelters undertake maintenance as they announced, 40% to 50% of the global refined tin supply will be affected, Li said. China accounted for about 30% of global tin mine production and 22% of global tin reserves in 2021, according to the U.S. Geological Survey.

"On a global scale, if the tightness in China is particularly acute, there will likely be spot metal in the rest of the world that could be imported — if an arbitrage between the London and Shanghai prices opens," James Willoughby, market analyst at the International Tin Association, or ITA, told Commodity Insights in an email interview.

However, the production cuts may not be as severe as tin producers have said, according to analysts.

"There's a question mark as to whether they cut production but maybe they've got some stockpile anyway, and they continue delivering that," Mulqueen said. "There's probably not enough clarity at the moment."

"Some of that maintenance happens every year, so these big smelters' maintenance doesn't necessarily mean that the annual production targets are going to change that much," Mulqueen said.

Despite tin prices falling, smelters are not unprofitable, as current refined tin prices are still higher than ore prices, according to Li. Additionally, most tin smelters are small so they are able to stop or resume production quickly compared with smelters for other metals, Li said.

Demand-side headwinds

Analysts and industry players remain positive regarding the longer-term outlook for tin, driven by increasing demand for electric vehicles, renewables and energy storage. However, in the medium term, the slowing global economy and consumer spending will have a greater impact on tin and may drive prices lower.

"Longer term, we're still looking at increasing tightness in the tin market as demand growth accelerates and existing supply struggles to keep up. With this fundamental backdrop, we would expect higher tin prices to incentivize new supply," Willoughby said.

"[In] an overall downward commodity cycle, tin is more positive compared to other base metals," ITA's Beijing-based analyst Daniel Xia told Commodity Insights in an email.

However, tin, along with other base metals, is facing an economic rough patch over the next two years. For the next six to 12 months, tin prices moving below $30,000 per tonne and toward $25,000 per tonne "wouldn't be unexpected," Mulqueen said.

"What's been driving all base metals lower has been growing concern about the demand implications of tighter central bank policy [and] monetary tightening, particularly by developed economies. And [there is] also the potential demand ramifications of rising inflation, [the] cost of living crisis and the ability and willingness of consumers to spend on goods in the same way that they have done during the pandemic," Mulqueen said.

Tin is also "particularly vulnerable to a slowdown in consumer spending" compared with other metals, according to Mulqueen.

Around half of tin products are used in solder for electrical connections, according to ITA. Despite significant growth in tin usage in the photovoltaics industry, it only contributes about 7% to 8% at the moment, SMM's Li said.

Li believes that tin's valuation is too high. In addition to demand headwinds, "the supply growth is irreversible," Li said. The nearly doubled prices in the past year are expected to encourage tin supply, especially from Myanmar, and recycled tin in China over the next couple of years.

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