Elemental production: Varying tin prices impact local manufacturing output

As the largest exporter of tin on the planet, Indonesia has been enjoying a wave of strong demand and rising commodity prices in recent years as regional economic growth has surged.

Tin mining companies have been in for a wild ride in 2011, however, as tin prices diverged from those of other minerals and spiralled up and down throughout the year. These uncertain market conditions, combined with a number of other unrelated factors, have managed to hinder tin production, despite early predictions that 2011 would be a banner year for tin output in the country. There is, however, a silver lining in that the higher production during the first nine months of 2011 will likely boost overall production and profitability over the levels seen in 2010.

EXPORT POTENTIAL: Indonesia exported 78,715 tonnes of tin through the first 10 months of 2011, up 3.9% over the 75,778 tonnes recorded the previous year, according to data from the Indonesian Trade Ministry (ITM). Total domestic production of tin in Indonesia is expected to increase by 2.3% for full-year 2011, due primarily to the fact that a dramatic reduction of production was expected in the final two months of the year in response to market conditions.

Tin exports totalled 92,487 tonnes in 2010, down 7.35% from the 99,287 tonnes in 2009, according to the ITM. The value of tin exports reached $1.74bn in 2010, up from $1.27bn the previous year but far below the $1.99bn recorded in 2008. Primary export nations for Indonesian tin are led by Singapore, along with Japan and the Netherlands, according to the ITM.

Indonesia’s mining and refining operations are limited to two primary areas in the Bangka Belitung Islands located in the Karimata Strait between Sumatra and Kalimantan and the Riau Islands just south of Singapore. Widely used in a diverse range of products that include electronics, plating, lead-free solders and packaging, tin is a highly sought-after ingredient for a number of manufacturing processes. China, for instance, is a large consumer of tin in its thriving manufacturing industry and maintains much of its domestic production for internal consumption.

THE PLAYERS: The country’s tin-producing industry is dominated by the state-owned Timah, which is also the world’s largest integrated tin mining company.

According to company records, Timah produced 40,413 tonnes of tin in 2010, down 10% from its 2009 production level of 45,086 tonnes. The company cited adverse weather conditions and declines in the easily recoverable onshore reserves as the primary reasons for the production decline.

Through the first three quarters of 2011, the company’s production again declined significantly to 25,266 tonnes from the 29,252 tonnes recorded over the same time period the previous year. Despite the decrease in production, Timah benefitted from strong prices in the first half of 2011, which the company was able to leverage into a net profit of Rp689bn ($82.7m) through the first six months of the year.

This marked an impressive 113.9% hike over first-half 2010 profits of Rp322bn ($38.64m).

Company officials alluded to the fact that the decrease in production may not be entirely due to production constraints and could also be a result of market conditions. “Excessive supply will not be good for maintaining the world’s tin price,” the company’s corporate secretary, Abrun Abubakar, told the press in February 2011. “We will always control our production rate for reserve conservation purposes.”

Timah has also been investing heavily in expanding its downstream operations in recent years, adding a 2100-tonne-per-annum (tpa) solder factory at Kundur on Beltung Island in June 2009 and a new tin chemicals plant at Cilegon in April 2010.

Koba Tin is the second-largest tin producer in the country. Timah holds a 25% stake in the company, with the remaining 75% share held by the Malaysian Smelting Corporation. Total tin production for the company fell to 6900 tonnes in 2010, down from some 7337 in 2009, according to company statements.

These two large primary producers are further supplemented by dozens of small local operations throughout the country. The effectiveness of these small-scale operations has been diminished in recent years, however, after the government began citing the mines for environmental infractions. The proliferation of difficult-to-regulate, small-scale smelters began after the government banned the export of raw tin ore in 2002. New mining laws also restrict the smaller operations to less invasive river bank operations.

Unlike many other mineral mining operations in Indonesia, the tin industry also operates with a significant amount of downstream capacity for refining its ore. The largest smelters are operated by Timah at Metok, with a capacity of some 68,000 tpa, followed by the 25,000-tpa capacity smelter in Koba operated by Koba Tin. Another refinery, Bangka Belitung Sejahtera, is supplied through numerous small-scale miners operating in the vicinity and produced approximately 20,000 tonnes of tin in 2010.

SUPPLY AND DEMAND CURVE: In addition to the variety of factors, including adverse weather and the shutdown of mining operations in Congo, conspiring to restrict tin production, the commodity price’s rollercoaster ride through the global market in 2011 has spurred the Indonesian tin mining sector to take more proactive measures to stabilise its value. As the world’s largest tin producer supplying a majority of global refined tin exports, Indonesia has significant leeway to alter the global price of the commodity by controlling its output. This effect is compounded by the fact that the world’s second-largest producer, China, consumes the bulk of its production internally.

Initially, the carryover of strong prices from 2010 into early 2011 more than offset a slowdown in production caused by poor weather, a clampdown on small-scale operations and tighter export restrictions. But after peaking at a record high of $33,000 per tonne in April 2011 due to supply deficits estimated as some 22,000 tonnes, tin prices plunged below $25,000 in June before rebounding in late July to nearly the $30,000 level. This was then followed by concern over Europe’s continuing sovereign debt crisis and its effects on the global economy, which consequently sent tin prices tumbling in the third quarter of the year to around $19,000 in August.

BAN TO BOOST: In response, a total of 28 domestic tin producers accounting for a combined 40% of global exports implemented a self-imposed ban on tin exports starting October 1, 2011. The ban was to last until the end of the year in a bid to further boost tin prices to at least $25,000 a tonne on the London Metal Exchange. The action initially excluded existing contractual orders from Timah while restricting the company from participating on the spot market, although the Indonesia Tin Association (ITA) then asked the company in late November to halt all exports in order to expedite the rise of global prices.

The move marked a dramatic reversal by the industry after the government announced as recently as February 2011 that it would limit annual output to a maximum of 100,000 tonnes per year to protect stocks from illegal mining operations, which were proliferating due to the high tin prices. At that time, analysts were predicting that global tin prices could reach as high as $35,000 or even $40,000 per tonne before the end of the year due to a continued supply shortage, an estimate that indeed proved in retrospect to be overly optimistic.

By November the ban had shown only limited effectiveness in propping up tin prices which had remained below the $23,000 per tonne mark. Signs were showing, however, that the ban was becoming effective enough at restricting supply that many buyers, including those from Germany, Japan, South Korea and Taiwan, complained to the Indonesian Tin Association that they had begun experiencing difficulty in securing the metal. At the time of publication, the ban was still in effect. According to the ITM, only five companies exported tin in October 2011: Timah, Refined Bangka Tin based in Bangka Belitung, Eunindo Usaha Mandiri, Singkep Timas Utama and Tambang Timah (a subsidiary of Timah) based in the Riau Islands.

EXPORTS FALL: As a result of this work slowdown, tin exports from Indonesia were projected to fall to just 4000-5000 tonnes in November and December 2011, their lowest level in three years. This would be less than half of the 8986 tonnes shipped in November 2010, according to data from the ITM. Through the first nine months of the year prior to the ban, the country exported an average of 8136 tonnes.

While this slowdown in production and exports may improve commodity prices in the short run, it could ultimately prove detrimental to Indonesia’s tin mining sector in the long run if higher global prices drive mining operations in other countries to boost production. Although there are few new tin mine projects scheduled to come on-line in the near future, a combination of higher commodity prices and a slowdown in the local production could draw in new investors to boost exports onto the global market.

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The Report: Indonesia 2012

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