(The opinions expressed here are those of the author, a columnist for Reuters.)
* Deficit market fails to excite investors
* Funds drift away from London tin market
LONDON, Sept 7 (Reuters) - Industrial metal prices may be on a roll but no one seems to have told the tin market.
The London Metal Exchange (LME) base metals index has surged by 20 percent in three months. LME three-month tin , by contrast, remains trapped in a broad $19,000-$21,000 a tonne range that has defined trading for much of the year.
Indeed, among the major metals that make up the LME index, tin is the only one still trading below its year-start level.
True, tin's bullish credentials have taken a bit of a knock in recent months, but poor underlying supply-demand dynamics haven't stopped nickel's enthusiastic attendance at the base metals party.
Also true is that tin is often the laggard in the industrial metals pack, suffering from relatively low liquidity and resulting low fund interest.
But the disconnect with the rest of the LME complex is becoming ever starker, raising questions on whether something is more fundamentally wrong with this market.
DEFICIT, BUT WHO CARES?
If tin needed an excuse to rally, it wouldn't have to search too hard.
Tin producers' association ITRI, one of the few sources of statistical light in this market, expects global supply to fall short of demand by 22,000 tonnes through to the end of 2018. ("Tin Industry Review 2017", May 2017)
The deficit forecast is pretty conservative given expectations of "slow consumption growth rates of less than 1 per cent per annum" and "optimistic assumptions about new mine start-ups and a recovery in secondary refined tin output".
ITRI expects this shortfall to lift prices, which will in turn offer incentive for additional supply, returning the market to surplus by 2021.
In the copper market "deficit" is a magic word guaranteed to reverberate bullishly through the investment community. In tin, it seems to elicit no more than a shrug of the shoulders.
Maybe it's because right now there is no obvious sign of shortfall.
Production in Indonesia, the world's largest exporter of the soldering metal, is running smoothly by the chaotic standards of the past.
Official exports rose by 26 percent to 41,600 tonnes in the first seven months of this year, bucking a downtrend that had been running for four straight years.
Also wrong-footing the market is the amount of metal that has become visible in the Shanghai Futures Exchange (ShFE) warehouse network in China.
The Shanghai tin contract has only been trading since early 2015 but has already sucked in more than 10,000 tonnes of stocks, a significant amount in a 350,000-tonne global market.
The double fear is that there is more sitting in the off-market statistical shadows and that it may start to move out of the country after the export tax was removed at the start of 2017.
China did flip to net exporter of refined metal in July for the first time since October 2013, though volumes were a miniscule 136 tonnes. It's a potential red flag for future reference but there is, for now at least, no sign of an imminent flood of outbound shipments.
Graphic on LME tin price, spreads and fund positioning:
Tin's fundamental picture is no worse than some of the other base metals that have joined the recent rally. Indeed, if ITRI is to be believed, it may be considerably better.
But the fund money flowing into other parts of the industrial metals space is giving the London tin market a wide berth.
Money managers hold net long positions totalling only 1,260 lots in the LME tin contract, towards the bottom end of the range since the exchange started publishing this information in August 2014.
Moreover, there has been a steady withdrawal of fund players from the London tin market.
As of the LME's latest Commitments of Traders Report for Sept. 1, there were 60 entities listed in the managed money category of the tin contract. A year ago the number was 95 and two years ago it was 103.
Declining investor participation is part and parcel of a broader shrinkage.
Volumes fell by 31 percent in 2015, by a further 7.4 percent in 2016 and by yet another 10.6 percent in the first seven months of this year. That cumulative decline is much more severe than the broader drop in LME activity over the period.
LME stocks, meanwhile, remain chronically low, which has translated into severe tightness in LME time spreads. The benchmark cash-to-three months period <CMSN0-3> hasn't traded in contango since April.
The pieces of the liquidity jigsaw are starting to fit together in a way to suggest that the London tin market, already a small space, is set to diminish ever further.
BETWEEN TWO MARKETS
The Shanghai tin market, by contrast, is growing.
As with the LME, ShFE volumes have fallen this year, but from a high base. The investment crowd that surged into the Shanghai tin market last year has, so far at least, not returned this year.
But two other performance metrics, registered exchange stocks and open interest, have been rising. Market open interest exceeded 25,000 tonnes for the first time in both July and August.
That's still some way short of the 95,000 tonnes of open interest on the London contract at the end of July, but the LME trend is moving in a different direction. July's open interest was 10 percent lower year on year.
This is not to say that the LME is going to lose its benchmark pricing status to Shanghai any time soon.
The Shanghai market is difficult, if not impossible, to access for non-Chinese players.
Its credibility in terms of serving as a basis for global pricing is low, given the Chinese authorities' habit of tweaking the rules to influence price trends.
That, however, may be the real problem for tin.
It is now stuck between two markets. One seems to be contracting to a core function of cash settlement and the other is not yet ready to take its place.
Tin pricing has entered a twilight zone. And that, as much as any fundamental considerations, may be why it's slipping ever further from investors' radar.
(Editing by David Goodman)