(Adds comment from S&P in eighth paragraph.)
Sept. 24 (Bloomberg) -- The Indonesian government will stick with a rule change requiring tin producers to trade the metal locally before export, curbing supplies from the biggest shipper, and says the model may be applied to other commodities.
The new policy is designed to increase the value of tin shipments and establish a domestically determined benchmark price, according to Trade Minister Gita Wirjawan. It will be implemented over the long term, and shipments are expected to decline, Wirjawan said in an interview in Jakarta.
Three-month futures on the London Metal Exchange, which has traded the global benchmark for more than a century, rallied to the highest since March this month after the change took effect and Indonesian suppliers cut shipments. Stockpiles of the metal used to make solder and packaging are heading for the biggest monthly drop since January 2012. The new policy is causing confusion in the market, said Standard Bank Group Ltd.
“We have to see this policy in a long-term context that is for us to be able to increase value-added products domestically,” said Wirjawan. “The essence is that, if this succeeds, this can be an example for other products,” he said, without listing other commodities. The country is the biggest exporter of palm oil and largest mined-nickel producer.
Three-month tin futures traded 0.5 percent lower at $22,855 a metric ton at 4:58 p.m. in Singapore. That’s still 7.7 percent higher this month and headed for the biggest monthly advance since November. Prices rallied to $23,350 on Sept. 19, the highest level since March 19. LME-tracked stockpiles have shrunk 11 percent to 13,765 tons in September.
“We are the second-biggest producer in the world and biggest exporter in the world, we have to use a reference price that is determined in Indonesia, not another place,” he said. “We are keeping this policy for a while.”
The rule change, which took effect Aug. 30, is part of wider government efforts to boost the value of commodity shipments from Southeast Asia’s largest economy. Indonesia has ordered mining companies to build smelters as it plans to ban raw mineral-ore shipments from January 2014. The country imposed a tax on cocoa-bean shipments in 2010 to encourage investment in processing plants. Tin-purity rules were also raised this year.
“It is not very clear to me how having a benchmark pricing would add value to the domestic tin sector,” said Xavier Jean, director of corporate ratings at Standard & Poor’s in Singapore. “ The only effect it could have is largely indirect, if the market perceives domestic supply will be constrained by the new rules,” he said in an e-mail.
PT Timah, Indonesia’s largest tin producer which declared force majeure on exports after the policy change, wants to sell its tin to overseas buyers through the Indonesia Commodity and Derivatives Exchange. The Jakarta-based ICDX has traded 515 tons of the metal in total since Aug. 30, according to exchange data compiled by Bloomberg. Indonesia shipped 98,817 tons of tin last year, with 9,874 tons sent overseas in September 2012.
“We cannot expect higher trading just in less than a month, people need time to adjust to the new regulation,” said Gifar Indra Sakti, a Jakarta-based analyst at PT Sucorinvest Central Gani. “We should be able to create greater value.”
The global tin market faces a deficit of 6,000 tons this year, a fourth consecutive annual shortage, Standard Bank said in a report on Sept. 11. Indonesia’s rule changes were causing confusion and helping to boost prices, it said, forecasting $28,000 a ton next year.
“We have to be in a position where we can crystallize the value, determine the value,” said Wirjawan. “In three weeks, the price has increased from $20,000 to $23,000. So that really reflects that we are able to crystallize the value.”
--Editors: Jake Lloyd-Smith, James Poole