London 07/09/2016 - London Metal Exchange tin spreads flared-out to a $250 backwardation on Tuesday as a scarcity of available warrants - now at just 2,705 tonnes - lead to extreme spread volatility.
"You cannot run a terminal market with just around 2,700 tonnes," a trader said. On warrant stocks have not been this low since mid-2004.
Yesterday, the benchmark cash/threes spread traded from a $50 backwardation at midday out to $250 at the closing kerb, which was the widest mark since September 2015. Spreads fluctuated between contango and backwardation in July and August.
This morning, cash/threes at one point traded at a $226 backwardation - it was last at $150 - while the sensitive tom/next rate has traded at $3 backwardation, having gone up to $40 on Tuesday.
The all-time high backwardation was in September 2009 when it spiked to $730.
There is one holder of between 90 and 100 percent of warrants for cash and next-day positions, according to today's LME data.
Tin meanwhile set a fresh 2016 high of $19,670 per tonne yesterday - its best since January 2015. It recently traded at $19,460, up $10 on the previous close. Around 200 lots have changed hands on Select so far.
Given current physical premiums in most locations, it is unlikely that much metal will be attracted at current backwardation levels, the trader noted. US and Rotterdam premiums are in excess of $300, with low-lead above $400.
"That (c/3) will need to go above $300 at least...the backwardation punishment for shorts could get severe," he said.
The fundamental picture for tin remains supportive with political action restricting production in China and Indonesia.
LME stocks now total 4,390 tonnes, down from the recent peak of 7,370 tonnes. Also SHFE stocks are declining - now 1,902 tonnes, having peaked at 3,049 tonnes late in July from a low of 773 tonnes in January.
The global refined tin market was in a 7,200-tonne deficit in the first half of 2016, according to the latest estimates from the World Bureau of Metal Statistics (WBMS).
An environmental clampdown in China is affecting refined tin production. Yunnan Chengfeng Non-Ferrous Metal Co Ltd, the biggest private tin producer in China, resumed production earlier this week after environmental checks. But many smaller operations remain closed after a host of private tin smelters in China were forced to suspend production of crude tin.
Meanwhile, exports from Indonesia are falling, where production has been curbed by government restrictions, delays to issuing export quotas and adverse weather.
In the short-term, the immediate tightness may well settle down, but further flare-ups are likely, traders said.
The low level of stocks, as well as a favourable broader fundamental backdrop, is expected to further underpin the market.
"It would not be a surprise to see a price of $23,000 or $24,000," the trader said.
But the short-term risk is that tighter nearby spreads could lead to stock inflows, market participants noted.
(Additional reporting by Martin Hayes, editing by Tom Jennemann)