BUY OR SELL-Tin at all time high: Is rally sustainable?

* Tin rally fuelled by supply concerns
* Global deficit, other metals may dictate prices

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Tin prices roared to a record of $26,790 a tonne on Wednesday as the potential impact of rain on shipments from top exporter Indonesia exacerbated supply concerns in a market already struggling to meet demand this year.

Tight supplies in top tin producer and consumer China are contributing to the rally.

Three-month delivery of tin on the London Metal Exchange CMSN3 has jumped nearly 60 percent in 2010, surpassing a peak of $25,500 struck in May 2008. Then, supply worries from China and Indonesia as well as low inventories sparked speculative buying. 

But tin futures are thinly traded, so investor buying or selling can magnify movements more than in some other metals markets and a change in sentiment to the sell-side could quickly bring sharp losses.

Tin is known to analysts and traders as a "lobster pot" contract -- easy to get into, much harder to get out. But for an agile investor who keeps positions small, tin may offer opportunities.

STRONG FUNDAMENTALS REIGN

"Tin is a unique situation, where we do know there's always a supply issue," said Jonathan Barratt, managing director at Commodity Broking Services in Sydney.

The International Tin Research Institute (ITRI) has raised its forecast of a global supply deficit for this year to 17,000 tonnes, from 15,000 tonnes previously. Tin is used in food packaging and soldering of electronics.

Developments in Indonesia could push prices higher. The ITRI expects Indonesia to produce around 95,000 tonnes of refined tin this year, down from 101,000 tonnes in 2009 as heavy rains hit mining and more easily mined onshore reserves are being depleted.

"It's all in the matter of supply-demand and control," said Barratt. "What happened in Indonesia, as we know, there's been a change, the supply is being constricted."

A crackdown on illegal mining has hit small miners this year, and their output was also crimped by a 2009 law requiring miners to obtain permits. The crackdown in the main producing islands of Bangka and Belitung started in 2006, when it sparked a rally on the LME.

"There's a shortage of tin in the market. The rainy season in Indonesia is not helping. I don't think PT Timah is going to meet its output target this year," said a physical dealer in Malaysia. Indonesia's state-run PT Timah is the world's biggest integrated tin miner.
"A weak U.S. dollar and a general interest again in resources have been pushing prices of base metals, but tin looks a lot more positive because of supply concerns and its own strong fundamentals."

Timah (TINS) expects tin output this year to be in the range of 45,000 to 50,000 tonnes, lowered from a previous forecast for 50,000 tonnes made in May due to unseasonal heavy rains in the first half of this year.

China's tin refiners have been hit by an electricity shortage, forcing the second-largest refined tin producer Yunnan Chengfeng to halt production at its Gejiu plant. Top producer Yunnan Tin recently brought forward a maintenance shutdown of its smelter.

With China using most of its locally-produced tin, consumers will turn to Indonesia and smaller sources such as Peru, Malaysia and Thailand.

LME tin stocks at 12,545 tonnes are near their lowest since March 2009.

RISKS IN ECON OUTLOOK, EXIT STRATEGY
Any change in macroeconomic sentiment or heightened concern about the strength of economic recovery could also bring down the price.

The high price may force consumers to cut back on orders, in turn reducing prices.
"I think people have bought enough tin for their consumption. Why would you buy at the high prices?" asked a physical dealer in Thailand.

High prices raise the potential rewards for Indonesia's illegal miners to run the risk of boosting supply.

"It's following the metal complex but tin is clearly the metal with the best fundamentals," said a dealer in Singapore. "The other issue is, unlike other metals, the increasing price increases the chances of unrest in Bangka."

The police crackdown in Bangka four years ago, which closed a number of smelters, led to a violent protest by miners.

Tin is one of the metals with lighter volumes on the LME, and can be prone to sharp swings when base metals market sentiment changes.

It can be a difficult market to exit to turn paper profits into cash.

In October 2009, UK-based fund Ebullio controlled almost 90 percent of LME tin stocks and cash contracts, traders at the time told Reuters.

In a report to investors in March 2010, Ebullio Capital Management said its commodity hedge fund suffered its "worst month", slumping more than 86 percent, as it liquidated positions mainly in base metals. 

Tin prices plunged to $3,620 a tonne on Feb. 20, 2002, the lowest since the LME reintroduced its tin contract in 1989 on fund liquidation and aggressive sales from producers, including Indonesia.

From 1985-1989, there was a four-year suspension in trade on the LME tin contract. Before 1985, the contract was denominated in sterling. Source: Reuters