London 29/09/2016 - A stand-off in tin between long and short position holders on the LME has the shorts under the biggest threat.
Both are currently in the middle of this year's respective ranges, according to the LME's latest commitment of traders report, so both have the potential to get either longer or shorter.
But after a large jump in cancelled warrants earlier this month of 1,150 tonnes, stocks have continued to be drawn down and there is no sign of metal being delivered in.
LME inventories stand at 3,560 tonnes while on-warrant - or available - material is just 1,625 tonnes, the lowest since the LME started publishing data on a metal-by-metal basis.
The available material is tightly held - there is one warrant holder at 30-39 percent and another at 40-49 percent, two for the 'Tom' position at 40-49 percent and cash at 40-49 percent and another at 50-79 percent.
The backwardation of $76 in the benchmark cash/threes is still some way off last month's $250 or the 2003 high of $730 and has yet to tempt holders to relinquish and deliver back.
One reason why the backwardation has not yet returned to the highs is because longs are taking profits at higher prices, lending their positions and closing their positions square. Three-month metal peaked at $19,970 per tonne today, the highest since January 12, 2015, although it continues to be turned back by the psychologically important $20,000 level.
"It is not yet at a level to bring it back on warrant. It is very dangerous to be short right now," a market participant told FastMarkets.
Other metals such as aluminium and copper often overshadow tin due to its thin liquidity. But when there are movements, they can prove to be explosive and painful for those caught out.
"We saw the big flare out to $250 and then it rattled lower but stocks have crept lower - if I were short, I would be nervous," an LME trader said.
The decline in stocks is not a sign of end-user demand but is an attempt to move the market, participants said. A move above $20,000 could tempt material back.
"We had that large cancellation a few weeks back and in the past year or so we have had two or three instances where this has happened," a trader said. "Will wait to see what happens with it now but I suspect that it will appear back on warrant."
"They have sifted everything - now the question is how much longer they will hold it. It costs money to finance and keep the spreads tight but those holding it are said to have deep pockets, which makes it difficult to guess," he added.
Adding to the intrigue is option activity, which could add further fuel to the fire while prices move higher.
"There is the small matter of 1,500 tonnes of call options in December at $20,000 and if the market starts to break through the buying and borrowing of the December date to hedge these options could be very interesting," Malcolm Freeman at Kingdom Futures said.
The holder of the options may also have some of the long position, a second trader added.
"If it clips through then it could bring a big bang on spreads and if it stays tight things could get naughty. I wouldn't be surprised to see $22,000 - but it may do a nickel and move up and then come down again," he said. "But with options at the size of stocks, it normally doesn't end well."
Tomorrow's activity could get choppy - as well as the end of the month and third quarter, it precedes a week-long national holiday in China.
"If tin closes the week and month above $20,000, this is a good signal. It is not giving back much ground so far and it looks like it doesn't want to go down," the LME trader said.
But it might not rise much further because the long would not want to remain exposed over an extended period, the second trader countered.
"Tin is illiquid and they will need liquidity to put it back on market," he added.
Still, there is no shortage of physical metal available. Premiums were unchanged at $75-125 per tonne for 99.9-percent-purity metal in Singapore while rates for metal with impurities below 100ppm were last at $250-300 per tonne.
(Editing by Mark Shaw)