Six months on, physical tin contract fails to shine

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A physical tin contract launched this year in the world’s top tin exporter, Indonesia, is struggling to attract enough liquidity to challenge the benchmark London contract, with the exchange authorities now looking to the government to boost volumes.

The Indonesia Commodity and Derivative Exchange (ICDX) launched its physical tin contract (INATIN) in February with the aim of giving domestic producers greater control over prices.

In the first six months of trading, volumes for the INATIN contract, which is backed by the largest tin miner in the archipelago, PT Timah, were often just one lot per day. The new contract registered only two trades in June and July.

ICDX chief executive officer Megain Widjaja said the lack of liquidity was due to traders being unwilling to sell at market prices, causing a wider-than-expected price differential with London Metal Exchange tin, which fell to a one-year low of US$17,125 a ton last week.

“The last two months have been very difficult,” said Widjaja. “It is primarily because of the price.”

The ICDX’s tin contract was expected to trade at a premium of about $300-$400 a ton compared to the LME contract, due to its minimum purity requirement.

Last week, however, INATIN was offered at about $21,000 a ton, almost $4,000 above London tin. “The market needs to learn that this is a physical market and we cannot fabricate prices,” Widjaja added.

Indonesia’s exports of tin, mainly used in soldering for electronics, rose about 4 percent to 96,020 tons last year.

The London Metal Exchange’s tin contract was first traded in 1877 and is used as a benchmark price for most consumers, traders and producers worldwide. In the past, the absence of regular data from Indonesia has made it tough for new commodity contracts to rival contracts issued by foreign
exchanges.

The ICDX had hoped the INATIN contract would become the reference point for local smelters and international buyers, but analysts said there was no real interest in physical contracts.

“There is not really the appetite out there, at least at the moment, for these physically backed base metal products,” said Barclays analyst Gayle Berry.

In a bid to revive the contract, Widjaja said the government would soon issue a decree linking royalties on tin exports to the INATIN price. The government currently imposes a 3 percent royalty charge.

“We expect to see progress no later than a quarter from now ... before the end of the year,” Widjaja said. “This will force the buyers and sellers to comply.”