Indonesia scores tentative tin win; blueprint for more commodities

* Tin trade rule seen as template for palm oil, coal, gold

* Powerful Widjaja clan behind ICDX physical tin contract

* Tin laws backed by trade minister with an eye on

presidency

By Melanie Burton and Michael Taylor

PANGKALPINANG, Indonesia/SINGAPORE, Dec 30 (Reuters) -

I ndonesia’s bold attempt to challenge the London Metal Exchange

(LME) for supremacy in the global tin market by imposing strict

export rules and driving up prices looks to be paying off.

Shipments from the world’s biggest tin exporter slumped to

below 1,000 tonnes in September from over 6,000 tonnes after

Jakarta ruled at the end of August that all tin ingot shipments

should trade via a local platform, the Indonesia Commodity and

Derivatives Exchange (ICDX), before being exported.

By November, shipments had recovered to August levels, but

tin prices have risen more than 8 percent to $23,000 a

tonne since the end-August policy move.

“By imposing the new tin trade rules we have set a price

target at $25,000-$29,000 a tonne this year,” Sutriono Edi, head

of Indonesia’s Commodity Futures Trading Regulatory Agency, told

Reuters. “It’s better for us to export less volume but for

higher value and better prices, than export a bigger volume but

with low value and low prices.”

The stricter trading rules, and subsequent drop in exports,

spooked suppliers to some of the world’s biggest electronics

companies, including Apple Inc and Samsung Electronics

. Neither company responded to emailed requests for

comment. Indonesia controls 40 percent of internationally traded

tin and, outside China, supplies up to two-thirds of Asia’s

electronics industry with a material used in circuit boards that

go into smartphones and tablets.

Indonesia hopes the new rules will also deter illegal tin

mining and set a blueprint for other commodities where the

country is the world’s biggest exporter, such as palm oil,

thermal coal and nickel ore, industry and government sources

said. It is also home to the mine which holds the world’s

biggest gold reserves.

“We have the chance to be a price setter for tin,” said

Trade Minister Gita Wirjawan, a former Goldman Sachs banker who

has presidential aspirations. “If the ICDX succeeds in keeping

prices up, we can make it the basis for other commodities.”

While tin contributes less than 1 percent of Southeast

Asia’s biggest economy’s GDP, it is a test case for a government

keen to flex its muscles in global commodity markets.

“STRANGLE THE MARKET”

The new rule slashed trade between buyers and sellers who

cannot directly agree term deals for 2014. Traders stepped in to

fill the gap, but Indonesia’s supply, now under government

control, has left some traders uneasy.

“There are a lot of customers trying other sources,” said

one physical tin trader whose company has signed up to the ICDX.

“Maybe what Indonesia wants to see is they strangle the market a

bit, then LME stocks start running down and the price goes up.”

Several top-tier LME members, including JPMorgan Chase

are showing interest in joining the ICDX, metals traders

said, in a sign the new contract is gaining traction and could

be a serious challenger to the LME, which owns the 136-year-old

metals contract that is the global benchmark. JPMorgan did not

respond to a request for comment.

Launched early last year, liquidity in the ICDX tin contract

had ground to a halt until a relaunch of several contracts and

the new government regulation gave it new life from August.

“The ICDX has established itself as the only credible source

of supply for Indonesia’s physical market – it’s quite an

achievement,” said one London-based trader. “If there’s no chaos

on the supply side, I should have more confidence next year that

I should get the tonnage supplied as promised.”

Some people in the tin industry said there was a risk that

the LME, now owned by the Hong Kong Exchange and Clearing Ltd

, could become complacent. “The new owners … are not

paying attention to the risks to the current contracts,” said

one senior metals industry source. “If (ICDX) can get enough

physical prices based on their new reference, that could give

it an opportunity to launch a product to rival LME pricing.”

A spokeswoman for the LME declined to comment.

“FAIR AND EQUAL”

Indonesian officials say the new laws should prolong the

life of the country’s depleting tin reserves through sustainable

mining. Critics counter that it’s more about restricting supply

to a narrow channel and raising prices to benefit vested

business interests – a charge government ministers deny.

The ICDX was founded by 11 palm oil and gold producers in

2010, and is headed by Megain Widjaja, the grandson of Eka

Tjipta Widjaja, one of Indonesia’s wealthiest oligarchs.

The family’s conglomerate, Sinar Mas Group, has investments

in palm oil, pulp and paper, banking, property and telecoms, and

Forbes estimates the family is worth $7 billion. The group,

which has no other tin interests, is one of six owners of the

ICDX via PT Sinarmas Futures, according to a list the exchange

provided to Reuters. The list names PT Swarna Abadi Perkasa, PT

Interlink Data Services, PT Karya Duta Perkasa, PT Inti Kencana

Mas and PT Logam Mulia Pratama as the other five shareholders.

“It’s not true when critics say the regulation is only

benefitting certain business people,” said Trade Minister

Wirjawan. “The regulation benefits every exporter and is fair

and equal to everybody.”

Earlier this year, Indonesia set purity rules on the amount

of lead in tin and from next month will ban all unrefined metal

exports. Tin smelters that can’t meet the new purity rules are

unable to export and, instead, have to feed larger smelters,

upgrade their facilities, or not survive.

The sharp drop in Indonesian exports rippled through supply

chains in the region, with smelters in Malaysia and Thailand

reliant on Indonesian tin. Global electronics giants are also

vulnerable to supply disruptions from Indonesia.

In Japan, which imports about 80 percent of its tin from

Indonesia, some trading firms have boosted inventories until

this month, but may then have to turn to LME warehouses.

Stockpiles tracked by the LME dropped to 10,005 tonnes this

week, almost a third below the levels before the new rule took

effect at the end of August.

“For somewhere like Japan or Korea, Indonesia is absolutely

critical and there’s just not enough tin around from other

sources to replace it,” Peter Kettle at global industry group

ITRI told Reuters in October.

WATERED DOWN

Indonesia, though, has a track record of watering down, or

even reversing, populist measures, fuelling expectations that

the authorities may yet prove not quite so tough.

In July, for example, the tin purity law was softened to

allow higher lead content after an industry backlash. And

policymakers are scrambling to ease overtly nationalistic

resource rules, including a pending ban on mineral ore exports,

and a royalty hike and export tax on coal.

“What happens in the short term, and what happens after the

Indonesian election is another question,” said a tin trader at a

Western bank, who is not authorised to talk to the media.

“For the short term, everyone has to play along because you

have to get the material. “But for the long term, no one knows -

it’s Indonesia.”

Indonesia scores tentative tin win; blueprint for more commodities