Tin: Between Recessions and Recovery

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Stop us if it's a familiar story: the commodities market goes south, metals decline, and the value of commodities in an investment portfolio sours.  That's the case for a wide number of metals, ranging from gold to cobalt, but it's not a universal story.  While some grumpy investors may say that it's merely the exception that proves the rule, those who put their money into tin at the metal's nadir have been more than happy to watch as the value of this ubiquitous metal has climbed, climbed, and climbed some more.  Tin has gained about ten percent in value ever since it hit a six-year low in June in one of the worst metal bear markets in history.  Today, investors must look at tin and decide whether or not the metal will continue growing or whether it's all been an illusion.

I'm Not Like You

Many base metals trade in clumps together, similar to how the price of silver usually follows the price of gold.  That's because demand for iron and steel usually comes hand in hand with the need for copper and zinc, whether a buyer wants to build a skyscraper or a car.  Tin resists much of this clumping, especially of late, where base metals have taken blows on the chin as Chinese economic slowdown pushes demand lower and lower.  That's because tin proves less valuable on its own than as an alloy or as a finish for another metal.  While we think of cans of tuna or pineapple chunks as made of tin, the reality is that only the exterior is tin while the rest of the can is made of steel or a steel composite that would rust if not for the coating of tin.  This means that demand for tin doesn't necessarily keep pace with demand for other metals, since buying one does not preclude buying the other.  Of all the metals on the London Metal Exchange (LME), the world's authority on base and precious metal trading, tin has arguably the least liquidity and thus reacts the least to the economic climate.  That means tin has been decoupled from the economic slowdowns in the EU, China, Brazil, and Australia.  Tin's not some kind of maverick, however: it too must adhere to the economic rules that dictate price and availability, both of which have played in its favor of late.

Up For Grabs

The LME has been in the midst of historically tight trading sessions in the past three months.  The tin market has gained on this tight trading space in addition to a glut of complications emerging from Indonesia, one of the world's largest producers of tin.  The Indonesian government has proven more than willing in the past to clamp down on their exports in order to get leverage on everything from zinc to palm oil.  Tin may be the next commodity to get an artificial upwards valuation thanks to Indonesian politics: the Banka smelting operations near to Sumatra have been given the orders only to sell to customers who can prove that they have purchased their tin from Indonesian mines certified as "clean" by the government.  As you may be able to guess, a "clean" mine certification means that the Indonesian economy gets to benefit from kickbacks and palm-greasing as companies try to get tin from point A to point B.  The resulting complications means that Indonesia exported less tin during the first six months of 2015 than it did during the last six months of 2014 despite 2014 being an historically low export year thanks to the rule that all metals must first pass through the Indonesian Metals Exchange before being shipped out.  With a jumble of new red tape in Indonesia comes welcome news for tin investors, who saw the metal lose more value in the past five years than any other base metal except for poor nickel.

Tea Leaves And Crystal Balls

Given that tin follows the market about as closely as a petulant kid walking to school on a Monday morning follows the most direct route, should investors consider tin a faux pas or a real engine of growth?  History suggests the latter.  Tin has shown a resilience on the market that many other commodities would love to have despite the overall drop in value.  In 2013, for instance, a glut of supply coming out of Myanmar was thought to depress prices, but a market eager for low prices snapped up the supply and created a global shortage.  It's hard to see a great white hope on the horizon, though the strong performance of automakers (and especially American automakers) could be the silver bullet needed to get tin onto a long-term upward trajectory.  What's more, tin represents a vital component of the miniaturization trend, since its use in circuitry makes it valuable for shrinking down everything from an iPhone to a complete circuit board.  That makes the base metal a good bet for long-term recovery.

Tin To One Odds

  • The Takeaway: lots of investors are ignoring base metals writ large due to the Chinese markets; a poor choice given the tin rebound.  Get value in your portfolio by investing in the Total Tin Return Sub-Index (JJT on the NYSE) or by investing in individual tin-mining companies like Glencore.  ETFs will provide better returns than futures contracts in the long term and the JJT represents the highest-performing tin ETF without the need to sell at a particular date.  Hold onto the investment for a period of at least eight to twelve months in order to maximize growth along the recovery parabola.
  • The Indonesian decision doesn't just affect tin but also copper and nickel at a time when neither commodity has shown much change from their current bear market.  Investors with a penchant for risk should invest in these two metals alongside tin, since their odds for growth are not insignificant as Indonesia slaps more and more red tape onto their exports.
  • Base metal mutual funds have taken too much of a beating to be a viable option for investment.  Purchase metal commodities on an individual basis to profit from growth.

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