A warning to commodity investors from the tin market

I am a huge fan of commodities as an asset class. The ongoing industrialisation of emerging markets such as China offers investors who are patient the chance to make big gains. But recent activity in the tin market offers a valuable warning to anyone looking for a quick buck.

According to the Telegraph, a single investor – probably a hedge fund – has cornered the market in the metal. It owns thousands of tonnes of the stuff, say traders, and is estimated to control up to 90% of all physical tin stocks. The mystery investor is almost certainly gambling on a supply shortage – caused in part by Chinese demand after Beijing doubled imports of tin this year – to drive up prices further and increase the value of the holding.

The problem for everyone else is that one player cornering the market in this way drives up “spot” prices for immediate delivery of tin – so much so that the current tin price (about $14,000 a tonne at the London Metals Exchange) is sitting above the price for three-month forward delivery, an unusual situation known as a “backwardation”.

This is a gamble that may or may not pay off. Prices dropped 35% last year, but have risen by around 40% from this year’s lows. But other investors need to watch out. The relatively small size of some commodities markets in terms of the amount of physical asset available means it is possible for a handful of big players to cause high volatility by either stocking up on, or dumping, a particular metal. That’s simply not true of much larger, more liquid markets such as foreign exchange, bonds, or many large blue-chip equities.

So be very wary of taking short-term positions on any single commodity using, say, spread bets or exchange-traded funds (ETFs) unless you are pretty sure you know what’s going on. I wouldn’t want to be “long tin” for example the day the mystery hedge fund investor decides to sell up.