Indonesia’s Tin Export Ban – Success or Failure?
The expected boom in tin prices from Indonesia’s tightening of conditions for tin exports has not appeared. Or at least we might say it has not had the effect that Western traders and producers had expected. That is not to say that it hasn’t worked out the way the Indonesian government wanted.
The mistake outsiders made was in thinking that Indonesia wanted to ramp the tin price. Whilst every producer wants to see its prices higher, in this case, the goal of the government was twofold, firstly to have tin trading shift from the LME and the Kuala Lumpur exchange to onshore and secondly to ensure that all tin mined in Indonesia was processed to the maximum level possible within the country to maximize value-added. In the second aspect its strategy was mirrored in the nickel market where it implemented similar rules. In both cases they were directed towards China which had been acquiring concentrates in both metals and exporting them to the mothership for processing. Indonesia’s actions reflect an interesting new twist on resource nationalism where quite justifiably producer nations want to make sure they have as much of the value-added component generated domestically rather than just being glorified quarries for the Chinese.
There is some disappointment that nickel has responded so positively to the export restrictions and yet tin has not. There are reasons for this that I shall discuss further on.
In the case of tin it was scarcely a situation in which one needed any more good “bad news” but the actions of the Indonesian government were viewed as icing on the cake for a sector that was already facing a supply shortfall in the face of a demand ramp-up.
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We have seen a number of countries in recent times introduce measures (largely export curbs on concentrates) to try and keep more of the value-added chain in-country, a good example of this was actions that the DRC took effecting copper and cobalt ores and South Africa with relation to Direct Shipping Chromite Ore.
Indonesia joined this bandwagon announcing last year that from the 1st January 2014 it was implementing a law prohibiting the export of unprocessed metals, including tin, as part of a drive to refine the ores and potentially generate higher margins.
As the largest player besides China, Indonesia is the force to be reckoned with. And its tightening action roiled the tin market. It’s worth looking at the chart above which shows that production in the South East Asian nation has been gradually moving from state and major players to smaller players. Not only are a plethora of juniors more difficult to herd with government policy they also cannot be coerced towards building refineries towards further upgrading of concentrates in the same way that majors can. So what has gradually transpired is a shift towards a more fragmented industry upon which the Chinese buyers have then employed a divide and rule strategy whisking the concentrate back to the mother-ship for on-processing.
The Exchange Issue
In what is ostensibly a lesser issue, but not regarded as such by the Indonesian government, there was also a change in trading requirements in tin. In a move presumably designed to lessen the LME’s dominance in tin and boost Jakarta as a financial centre, at least in commodities the country produces, the government also introduced a requirement that tin be traded on a local exchange before shipment. This cuts the LME out.
All was not as simple as the government imagine as the measure was taken without really considering the inherent flaws in the existing tin trading that happens in Jakarta. For instance Reuters quoted one Singapore-based trader that said that the current contract required a very high margin deposit for every trade, with commission being very high and the liquidity is “very, very low”. The latter aspect though is presumably one of the reasons the government wanted to channel more business through the Indonesian Commodity and Derivative Exchange (ICDE). More importantly maybe was another commentator’s observation that currency risk was a big issue given the mismatch of daily pricing of the Indonesian contract to global benchmark LME official prices. He went on to say: “That must make the trading of the metal next to impossible – you’d spend 60-70 percent of your income hedging the currency and hedging tin as well”.
Here we have yet another example of government’s stumbling into the financial markets without having a good grasp of the minutiae of trading in arcane metals.
The Naysayers Appear
The combined moves did not go down well with the country’s chamber of commerce (Kadin) which warned that Indonesia’s mining industry would collapse if the government moves ahead with a planned ban on the export of coal and tin and nickel concentrates.
The Financial Times reported that both mining companies and independent economists were critical of the move, arguing that at current depressed global prices for both raw and refined minerals, it is not a financially viable option in infrastructure- and energy-poor Indonesia, especially with no commitment to invest from the government.
The FT also reported that a report funded by the US Agency for International Development had argued that the push towards refining coupled with the ban would create few jobs and could lead to $6.3bn of lost economic benefits annually by prioritising spending on refineries with “poor commercial prospects” over other “pressing needs” for capital investment, for example in the country’s decrepit education, health and infrastructure systems. What USAID knows about the economics of refining can be written on the back of a small postage stamp so we would interpret this as a rather desperate attempt by the powers that be in end-processing and trading resisting being forced into developing a domestic refining industry. If Indonesia was a minor player in the ranks of global tin we would see it as folly to be pursuing this path but as it is a lead exporter the country clearly has a case that more of the value-added should remain onshore. For too long leading countries in particular metals categories have been seen as jumbo-sized quarries and nothing more.
Some of the prognostications smacked of Apocalypse Now. The FT reported Garibaldi Thohir, a vice-chairman of Indonesia’s chamber of commerce as saying that “If the government implements a full ban, the whole industry will collapse,” given that there are only a handful of smelters in the country. Some of these complaints though are more linked to the issue of nickel than of tin.
The Effects Start to Bite
The new rules started having an effect some months in advance of the official start date with the nation’s biggest tin producer, state-backed PT Timah, halting shipments and declaring force majeure. P.T. Timah declared force majeure as customers had not registered to trade tin on the ICDX. At that time (November) the firm expected exports to improve over the last two months of the year. Surprisingly the president of Timah was reported by Bloomberg in October to be “fine” with the situation. His rationale was that the company had a good stockpile and that they expected prices to breach the $25,000 mark and they would make more money by selling later at higher prices.
Source: Stellar Resources
As it turned out the exports have been irregular to say the least with dramatic spikes and plunges, making a clear picture hard to gauge. One wonders whether smelters are stockpiling product hoping that rules will ease and then running out of funds then suddenly ship large amounts and then repeat the process.
Indonesia’s government was clearly placing a bet that it thinks will pay off large because in the short-term there shall be some pain. Some projections late last year were that Indonesian refined tin shipments were expected drop by around 75% in September-December from the same period of 2012. However as can be seen they dropped and then surged. Going back to the price chart at the start of this piece one might note that the periods of price weakness come directly after the Indonesians have these bumper export months.
Further Tightening of the Noose?
In an example of the truism that water finds its own level, the actions against exports of tin ingots have begun to introduce distortions. As the new rules were designed to force foreign buyers to acquire tin ingots onshore they were not applicable for exports of tin solder, which is the rising and main usage of tin as the moment.
Thus buyers had found an escape valve and as a result the exports of solder rose rapidly. Noticing this government started to look for ideas in order to terminate this loophole.
The government decided to introduce a new law which suggests separate export license for pure ingot, pure non-ingot, tin alloy and solder. This means that integrated tin miners will have to produce and register separate subsidiaries and export license.
Once again, playing the Jeremiah, PT Timah were reported as griping that this may ruin the export of tin ingots and as per the rule, a company with one export license can only produce one product. Obviously the government has cottoned on that major players have been gaming the new regime and thus have prompted an official response which the users find draconian.. But they would, wouldn’t they?
All in all, the new regime in tin exports would seem to us to be a success for the Indonesians (despite some attempts at evasion). However, we are only half a year into the new scheme and tectonic shifts take longer to achieve than that, particularly when new refineries/smelters are called for. In the longer term though, the benefit will be that Indonesia still has tin supplies when otherwise (without these measures) it would have been out of the game. It is worth recording that Indonesia was once a prominent member of OPEC and that squandering of its oil resource (and a growing economy) turned it into a net exporter. That lesson has seemingly been learnt.
The Western economies should reflect upon the fact that the Indonesian actions might actually play into their hands by having the Chinese forced into buying already processed metal as it weakens the longer-term ability of the Chinese to transfer all elaboration on-shore to the exclusion of Western users. The Chinese attempts to not only dominate mining of Tin, Tungsten, Antimony and Rare Earths, and also their value-chains, are directly threatening to Western interests.
That the Tin price has not rocketed as some might have hoped is not a bad thing. Metals that spike, almost always have a violent return to earth. A gradual rise that provokes reopening of old capacity or the construction of new mines and mills is always the best way. This does not mean though that a Tin crisis five-ten years out does not await us. Now is the time to seize the opportunity and start investing for that day.
Christopher Ecclestone is the EU Editor for InvestorIntel and is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten ... <Read more about Christopher Ecclestone>