Indonesia tin royalty moves support prices, economy key

The latest government crackdown on the Indonesian tin industry will damp some production and support benchmark prices, but the uncertain economic and demand outlook will play a bigger role in the market, analysts said on Friday.

A senior trade official said on Thursday that Indonesia, the world's top refined tin exporter, is looking to revise its royalty payments made on all domestic tin shipments, to close a tax loophole and bring these in line with existing charges on exports.

The trade ministry is now working on a revision of the decree on tin export rule, which could merge the previous inter-islands or domestic tin trade regulation with those for international tin export regulations, Deddy Saleh, director general of foreign trade at the ministry told Reuters.

"They (Indonesia) are constantly trying to plug up the holes in the dyke, so it's just more of the same," said David Thurtell, metals analyst at Citi in Singapore.

"If it works - and there has been significant leakage - that would tend to perhaps discourage some production -- particularly the high-cost marginal stuff."

Tin, used in electronics, plating and lead-free solders, struck a record high above $33,000 in April. A crackdown on illegal mining, tighter export regulations, declining onshore reserves and rain that had limited Indonesian production have helped drive the tin rally earlier this year.

At 0928 GMT, benchmark tin on the London Metal Exchange (LME) was at $23,000 a tonne, up from $22,750 at the close on Thursday.

"It is mildly (positive for prices) but it could be massively outweighed by the deteriorating outlook for the world economy," Thurtell added.

Indonesian smelters are only allowed to export tin if they can produce refined tin with minimum purity of 99.85 per cent and source ore from legal mines or team up with miners with permits.

By revising the current tin export rule, the government is trying to ensure that tin metal exports meet the 99.85 percent condition - whatever its shape - be it bars, wires, statues or spoons (kitchen ware).

"I am not sure if that will regulate tin exports," a Singapore-based metals merchant said. "Knowing the players in the market, documents will be fudged to show ingots as 99.85 (per cent) minimum purity."

Tight supplies and resilient demand will keep tin prices high this year, despite the impact of the earthquake on big consumer Japan, a Reuters poll of metals analysts showed in April, before recent recession fears emerged.

Last week, the Indonesian Tin Industry Association said an environmental crackdown in the main tin producing region of Bangka island, was hindering domestic smelters' supplies.

"Every time the price of tin dips a little bit, the Indonesian government trots out something new to make life harder on the tin industry, in terms of its ability to supply the rest of the world," a second Singapore-based analyst said.

"Anything that will tighten the rules, is likely to have a positive impact on prices," he said. "The questions is, how much tin was finding its way out of Indonesia, via this inter-island loophole."

Resource-rich Indonesia may be accused of taking with one hand, but it can't be blamed for not giving with the other.

The finance ministry said this week Indonesia will give a tax holiday for investors committing at least 1 trillion rupiah ($117 million) into sectors including metals and energy. The archipelago is actively looking to spur record foreign direct investments.

"The world is worried about things slowing heavily," said Dominic Schnider, head of commodity research and analyst of UBS Wealth Management in Singapore.

"It may pay-out once things improve," he added, referring to the global economic slowdown. "In the short-term the impact is limited... right now if you have an investment you are not going to accelerate it, and if it motivates new investment, it's one or two years."

The tax holiday will exempt investors from taxes for five to 10 years after their firms start operations, though the duration was being discussed, Finance Minister Agus Martowardojo said.

Planned investments include $6 billion in a joint venture steel plant by South Korea's Posco, the world's No.3 steelmaker, $4.5 billion by Honam Petrochemical Corp for a petrochemical complex, and $8-$9bn from Kuwait Petroleum Corp to build an oil refinery.

"If you look at Indonesia and where all investments are taking place - its Kalimantan and Sumatra," he added. "These investments have gone up massively... the country should focus on others, like manufacturing."