Bumpy Road For Tin Shares

Bumpy Road For Tin Shares
April 12, 2010 | 09:33 GMT(+7)



Reporting: Abraham Lagaligo

Illegal market ruins the price. New dynamics will be seen by 2010. It could be an alternative for long-term investment.
With a flat tone, Wachid Usman, President Director of PT Timah, Tbk., introduced the board members and commissioners of the company in front of a hearing forum held by the 7th Commission of the Legislative Board, on 3 February 2010. In the occasion, he emphasized PT Timah’s vision to be a world class company and to be the leader of global market for tin commodity.
To achieve its long term goal, the company listed in the stock exchange as TINS would focus on four main business throughout 2007-2012, i.e. upgrading product quality and production capacity, developing downstream tin product, developing non-tin businesses (coal, iron ore, nickel, etc.), and developing the shipping and docking services business.
The optimism, Wachid Usman further elaborated, was encouraged by the current tin industrial and market situation. Tin has been a minor metal (only 2% of whole non-ferrous metal commodities), with limited source from Asia, South America, and also, to a lesser degree, from Europe, Africa, and Australia. Tin has been used for soldering (52%), tin plate (19%), tin chemical (13%), and also as a mixture for another metal.
In 2010, the world tin consumption was predicted to reach 290.000 tons, and would continue to alleviate due to the absence of substitution product. Prior to the global economic crisis in 2009, the world demand for tin was accounted 320,000 – 360,000 tons per year. Indonesia is currently the second largest tin producer (28%), right below China as the largest. TINS contributed 48,000 tons to Indonesia’s total tin production that sum up to 63,000 tons. In 2009, TINS has sold 49,000 tons of tin. 65% of the sales went to the Asian market, 25% to Europe, 8% to United States, and the rest 2% were allocated for domestic sales.

Black Market Ruins the Price
Nevertheless, TINS optimism would likely meet a bumpy road ahead, because until early 2010 the mineral mining commodities have not shown any significant prospect, compared to the energy sector. As Norico Gaman, BNI Securities Head of Research, envisaged, the tin industry would require more time to grow, to restore its good times like back in 2007. The prediction reflected in the current world tin price that has tend to weaken, compared to the average price in 2007.
“Back then (in 2007), tin price could reach up to US$30,000 per ton. Now, it only sits in the range of US$16,000 – US$17,000 per ton,” Norico Gaman told TAMBANG Magazine on 1 March 2010. According to him, the global trend of demand for tin is still very limited. The weak demand has been caused by two main factors. The first is because the real demand has not shown a significant growth, and the second is because of the illegal business player who exports tin to the black market.
Although an export quota has been set, many have still involved in illegal tin smuggling practices. As a result, tin price could not grow as well as nickel or copper. The government has set the export quota at 90,000 tons per year, to stabilize tin price. Nevertheless, buyers abroad still take benefit from those illegal tin exports.
Actually, it would not be such a difficult task to control Indonesia’s tin exports. There are only 2 major players in the business, TINS and PT Koba Tin. The producers were also obliged to export processed tin in the form of 99.98% Sn, as a prerequisite of London Metal Exchange (LME). The problem is, there are a lot of individual players who illegally export raw tin from Indonesia.
Consumers abroad buy the commodity form illegal market, and gain more profit from processing it. Among others, a tin smelting factory in Singapore has been functioned in those illegal operations. Raw tin was brought in by small vessel, sailing discreetly from Indonesian waters. These illegal tin goes to the market and ruins the price.
The biggest mistake, Norico Gaman asserted, lies in the government’s lack of consistency in applying the rule of law. It seems that the government remains to ignore those violations. “When I went to Bangka in 2009, I saw first hand that many boats belonging to local people were carrying tin, from both on-shore and off-shore. After that, they would sell the tin illegally,” he described. The local government let the illegal practices continue because they consider it as a source of living for the local people.
“They should have sold the tin to PT Timah to be processed. Nevertheless, many just easily export the un-processed tin,” he exclaimed. It is a dilemmatic condition, in which PT Timah as a state-owned company has the burden to grow continuously, while the regulation does not provide the support for it. The local government, in particular, has shown ambiguity. On one hand, they supported PT Timah. But, on the other hand, they support illegal mining activities, claiming that the activities are the source of living for the local people.
According to Norico Gaman, if Indonesia’s tin export could be maintained under 90,000 tons, then the price would not go below US$ 15,000 per ton. However, the ideal price would still actually be above US$ 20,000 per ton. Why? Because tin production cost could reach US$ 10,000-11,000. If it is only worth US$ 16,000-17,000 per ton, the profit margin would be insignificant, because there are other expenses outside the production cost.
“If the price has surpassed the US$ 20,000 level, only by then PT Timah could book a substantial profit,” he explained. In 2009, TINS was the worst state-owned company to have the lowest profit of only Rp270 billion. The net profit was 78.1% lower than 2008, when TINS managed to reap Rp1.34 trillion in total. The illegal off-shore tin mining in particular has caused an average loss of Rp50-100 billion per month. That amount would still have to be added to the loss caused by illegal on-shore tin mining. Meanwhile, those illegal practices have been going on for almost 10 years.
Due to TINS’ slouching financial performance, its share value at the Indonesian Stock Exchange has also been falling. During the second week of February 2010, the price was at the range of Rp1,900. Until March 2010, the once superior share in 2007, has not been able to reach Rp3,000 level. “In fact, as a specific commodity share, TINS should have been at Rp4,000 level,” explained Gaman.

Two Years to Recover
As a matter of fact, Gaman further explained, by seeing the potential of global economic recovery and the Asian economic growth, metal products has a very good potential. Tin, as a material for manufacturing, electronic, packaging, and other industries would mostly be demanded by Asian countries such as China, Korea, Taiwan, and Japan.
Nevertheless, TINS could not just hope for a recovery this year. In addition to the problematic issue of illegal mining and illegal export, the demand for tin from those manufacturing countries in Asia have not yet shown a significant increase. It would mean that it could not to get to the level of condition as before the crisis in 2007 just yet. Tin is expecting growth, but it would take two years to get back to that level. “I predict that TINS can get back on top by 2012, and that would be boosted by the economic recovery,” Gaman forecasted.
This year, the electronic and manufacturing industries have actually started to recover, but they would not enter their growth phase yet. The two industries have still been adjusting their existing production capacity to the global demand. Growth would likely start in 2011, when manufacturing industries would have increased their mining products consumption. And it would continue growing in 2012. By that time, tin would be encouraged with positive condition, so the commodity will expect significant growth. This 2010 is a consolidation phase for tin mining industry, by performing business diversification in the midst of weak demand.
Gaman predicted that, in 2012, tin price could go above US$ 25,000 per ton, within the range of US$ 27,000 -28,000 per ton. This year, it would already be a good sign if PT Timah could produce 50,000 tons of tin, because last year it could only produce less than 50,000 tons. The average price for this year would be US$ 18,000 per ton, rather higher than last year’s US$ 15,000 per ton. The lifting cost for tin itself could reach US$ 12,000 per ton.
The lifting cost would be difficult to cut, unless by doing energy efficiency or using more economic technology. Both strategies would be very important for TINS to be considered, because market price is more difficult to control. PT Timah, Tbk. is indeed one of the world’s largest tin exporters, but pricing has its own mechanism with the market rule.

Applaud for the Expansion
Nevertheless, Norico Gaman applauded TINS effort to build tin chemical factory. Although it has not served as a core business, because it still depends on the export market, tin chemical factory would be very strategic for TINS’ growth in the long term. At the very least, it serves as a reason for investor to buy a portion of TINS’ shares. “The government should have been more serious to encourage domestic manufacturing or automotive industry, so value added products such as tin chemical could be absorbed optimally by domestic market,” he elaborated.
The complicated problems that TINS had to face, i.e. illegal mining and negative image for environmentalists, would not produce negative sentiment for TINS. Investors’ consideration to leave or to enter market would rely on commodity price. After all, the problems are mostly impermanent difficulties, which are open to solutions. “If all the reserves are drained out, then it would be permanent problem. As long as they can manage to handle the problems, investor would still be interested,” Gaman emphasized.
Pardomuan Sihombing, Assistant Director Research for PT Paramitra Alfa Sekuritas, told TAMBANG Magazine in a separate occasion, that TINS has shown a better performance now. At this time when tin price has been deprived, the state-owned miner has quickly decided for an expansion to coal mining sector. TINS has also expand its business to transporting business, to keep its vessels operating. With the shadow of the global crisis lingering, tin might again experience a dark-age, as illustrated in the movie entitled “Laskar Pelangi”. At this time, expansion and diversification may serve as a life-boat for TINS.
Sihombing predicted that, in 2010, investors would still aim for shares like TINS for long term investment. At the moment, because mineral companies have been booking poor financial reports, short term investors flee to those shares whose products could be absorbed by domestic market, such as banking, consumer, and infrastructure. As an example, TLKM (Telkom) shares could boost to Rp6,000-7,000. PGAS has also experienced the same.
“TINS got hard hit because its market abroad has been ill. When the illness is abroad, we tend to look for shares that have vast domestic market,” Sihombing reviewed. For long term investment, it would be okay to acquire TINS shares, just be careful not to jeopardize the cash flow. Price dynamics for commodities shares such as TINS also has a potential fluctuation for trading. Tin share price is influenced by oil price, when oil price is drops the tin price will go along.

PT Timah Tbk (TINS) at a glance:
- Listed in the Jakarta Stock Exchange, Surabaya Stock Exchange, and the London Stock Exchange since 19 October 1995.
- Product: tin solder and tinplate (tin blocks)
- Mining operations area: Bangka – Belitung Islands Province and Riau Island Province.
- IUP Exploitation area: 522,459 ha (on shore = 332,605 ha, off shore = 189,854 ha).
- Total tin reserves: 1,009,352 tons (on shore = 376,794 ton, off shore = 632,558 ton)
- Production target: 60,000 ton (2010).
- Expansion / business diversification:
-Tin chemical factory construction in Cilegon, Banten, with estimated production target of 30,000 tons by 2013.
-Coal mining in South Kalimantan, under the name of PT Tanjung Alam Raya, production = 1.5 million tons/year.
-Dredging services business in Johor, capacity = 3 million m3/year
-Gravel Pack Sand Factory in Riau, capacity = 300,000 tons/year
-Iron ore exploration project in Belitung
-Nickel ore exploration project in Southeast Sulawesi
-Asphalt processing project in Buton, capacity = 120,000 tons/year