The rise in tin prices signals a long-term recovery for the
long-forgotten industry. The former CEO of Malaysia Smelting Corp
explains what’s driving the new upcycle and what it will take for it to
be sustainable.
Mohd Ajib Anuar looks tired and drained as he walks into the boardroom
of Malaysia Smelting Corp (MSC). It is a muggy afternoon in Kuala
Lumpur, and the Muslim fasting month has just started. But he snaps out
of his languor as soon as he begins talking about tin, the metal that
made fortunes for many Malaysian tycoons through most of the last
century.
To be sure, the tin business has been viewed as something of a sunset
industry since the mid-1980s. Yet, since the global financial crisis,
tin prices have climbed steadily higher, amid a persistent supply
deficit in the face of growing demand. Now, Mohd Ajib sees a new dawn
breaking for the tin business. “Definitely. No question about it. The
tin industry will grow into a more sustainable industry,” he tells The
Edge Singapore.
Mohd Ajib, 64, has worked in the tin business for more than four
decades. He was CEO of MSC from 1994 to 2013. The 127-year tin smelter
is dual-listed in Singapore and Malaysia, and ranks as the world’s
second largest producer of tin metal. It is controlled by The Straits
Trading Company. Mohd Ajib isn’t planning to fade away into retirement,
though. He has been appointed adviser to the board of MSC. He is also
currently chairman of Malaysia’s Tin Industry Board, and continues to
play an active role in a host of other tin industry organisations.
In fact, Mohd Ajib says he plans to remain active in the tin business
for the next couple of decades, which he believes will be an exciting
time for the industry. Specifically, he wants to help promising tin
companies around the world realise their full potential, and hints that
he is already working on “something big”.
His optimism is underpinned by the expanding uses of tin in recent
years. Take the capsules on wine bottles for instance. The protective
sleeves, which prevent the cork seals from being gnawed by rodents and
other pests as they sit in cellars, were historically made of lead. But
these were phased out due to fears of lead poisoning, and are now
largely made of tin or aluminium.
In May, tin research promoter ITRI launched a committee to push for the
use of pure tin capsules for premium wines at an exhibition in Hong
Kong. “It’s the best capsule for the best wine. It’s non-toxic. The
mechanical quality is good. The chemical quality is good. It looks very
nice,” says Mohd Ajib, laughing at his own enthusiasm.
There are, of course, many other new and less mundane uses of tin.
Notably, environmentally friendly uses of tin have been discovered
through collaborative research by ITRI and companies such as Panasonic,
Sony, Nokia and Motorola.
Today, tin chemicals are used in lithium ion batteries and modern fuel
additives. According to Mohd Ajib, recent fuel additive trials in China
and Peru achieved 10% to 15% energy savings for fishing boats and earth
moving equipment, while carbon emissions were 20% to 30% lower. MSC’s
own subsidiary Rahman Hydraulic Tin has been involved in work on
tin-based fuel additives.
Riding new technologies
Tin has been in use for some 5,000 years, though it was first mined in
large quantities in Cornwall, Britain in the 19th century. In the last
few decades, the story of tin has been shaped by the ebb and flow of new
technologies, and a succession of market crises.
In 1985, tin prices collapsed when the International Tin Council, which
administers a buffer stock used to support prices, became insolvent.
The council was borrowing heavily to keep prices high at a time when
consumption was falling, which encouraged new producers such as Brazil
and Bolivia to flood the market. Meanwhile, in Malaysia, production
dried up as rich alluvial resources were exhausted. In 1995, global
consumption was just 180,000 tonnes, driven mostly by tinplating. Tin
prices at the time had declined to just US$5,000 a tonne.
Nearly 20 years on, consumption has doubled and the price of tin has
risen to US$22,000 a tonne. In fact, tin prices have risen 100% in the
last five years alone. One reason for this comeback was the switch by
the electronics industry to lead-free solder following regulations in
the European Union prohibiting hazardous wastes in 2002. Since then, the
miniaturisation of devices such as computers and smartphones has
resulted in less solder being used in the consumer electronics sector.
Industries like healthcare and defence, however, are taking up some of
the slack.
“The defence and medical sectors needed more time to establish the
durability of the soldering materials. But now that it’s been confirmed
by the consumer electronics sector, they are taking steps to convert to
lead-free solders, and this is where we will see growth,” says Mohd
Ajib. Even so, tin consumption last year was 350,000 tonnes, still below
the peak of 370,000 tonnes in 2007, largely because of the global
economic slowdown and the miniaturisation effect.
Looking ahead, Mohd Ajib figures demand for tin could keep growing as
computers and electronic parts find their way into just about
everything. The automobile sector, for instance, is increasingly using
electronic parts in the vehicles it produces. “So, for tin to show
further improvement in price, consumption and supply, it is not
impossible. Some people say it will shoot up to US$40,000.” ITRI has
forecast global tin consumption to rise at an annual rate of 2% over the
next five to 10 years. Consumption is set to exceed 400,000 tonnes from
around 2015.
Supply constraints
While demand for tin has been strong in recent years, supply has become
more uncertain. For starters, China has turned from a net exporter to a
net importer. That is significant as China is the world’s biggest
producer and consumer of tin.
At the same time, supply from Indonesia, which is the world’s leading
exporter of tin, has become more unpredictable. Small, artisanal miners
account for more than 80% of tin produced in Indonesia. The Indonesian
government has been trying to set standards in the industry, such as
requiring that smelters produce 99.9% pure tin. It has also mandated
that exports be made through the Indonesia Commodity and Derivatives
Exchange. On top of that, the Indonesian government has tried to control
the price of the metal.
The result of all this is that tin exports from Indonesia have become
erratic. “Stocks held at LME [London Metal Exchange] and by consumers
are at historical lows,” Mohd Ajib says. “So, with Indonesian supply
declining and China becoming a net importer, the market is going to move
into greater deficit within the next two to three years.”
While that could be good news for speculators, it isn’t really healthy
for the tin industry over the longer term, according to Mohd Ajib. To
foster higher consumption of tin over the long term, supply has to be
sustainable and prices need to be steady. How can that be achieved? Mohd
Ajib says the key is an industry-wide consolidation.
“Today, you have to buy from small-scale miners… but the global tin
industry will undergo a major shift, transforming the supply structure
from small-scale to more structured producers and a more sustainable way
of production,” he says. The reason is that a significant amount of
capital will be needed to create sufficient supply around the world,
perhaps as much as US$3 billion ($3.7 billion) over the next five years.
And, it is the largest tin companies that will be able to channel this
capital efficiently into proper exploration and mining schemes and
environmental programmes.
“It’s going to be more orderly. Of course, the cost will be higher, but
the electronics industry will be happy to see sustainability on the
supply side,” Mohd Ajib says. In fact, Mohd Ajib figures the price of
tin will have to be higher than where it is today — perhaps US$30,000
per tonne — to sustain production at the level of demand. At current
prices, only a handful of exploratory projects might be feasible, he
says.
According to Mohd Ajib, among the companies that are best positioned to
increase tin supply is Kasbah Resources, which has a project in
Morocco. Other promising players are Australia’s Stellar Resources and
Consolidated Tin Mines. Yet, it will take these projects three years to
prove their reserves before they can start developing the mines. Amid
continued supply constraints, ITRI has forecast a rise in tin prices to a
cyclical peak of US$35,000 to US$40,000 between 2015 and 2017.
Growing interest
Mohd Ajib began his career at a Malaysian unit of Anglo American. He
later worked for several years at Malaysia Mining Corp, which was
involved in tin, diamond and gold mining. As he tells it, he entered the
tin industry at the bottom of the cycle, when everyone else was trying
to get out. And, it is not that he lacked alternatives, as he was
offered jobs at big Malaysian government-linked companies such as
Petroliam Nasional and Perbadanan Nasional during his early years. “But I
stuck to tin,” he says.
What was the attraction? Mohd Ajib says the tin industry is small yet
very global, and it put him in touch with people all over the world. “I
just like this industry,” he says. “After 43 years, whether I am in
Japan, Korea or the US, I have a lot of friends.” Now, Mohd Ajib is
leveraging some of those global connections and becoming a dealmaker of
sorts, bringing companies that need capital for expansion to investors.
“I am working on something big. I have lots of friends all over the
world. In London, I know all the big brokers,” he says.
Will some of the companies he’s dealing with come to Singapore to raise
capital? For the moment, Mohd Ajib is keeping his cards close to his
chest. Yet, Singapore is a natural hub for tin producers. More than 70%
of Indonesia’s tin exports are sent here for warehousing and
redistribution. Meanwhile, MSC itself counts several thousand retail
investors in Singapore.
Yet, Hong Kong appears to have had the edge in attracting huge mining
companies. In recent years, it has trumped Singapore by winning over the
likes of United Company ­RUSAL, Glencore and Kazakhmys. Mohd
Ajib says if Singapore is to become a listing venue for big resources
companies, a lot more work has to be done to educate investors. “The
resources business, whether it is tin or gold, is a long-term business,”
he says. “The lead time to develop resources can vary from five to 15
years. So, for investors to go into resources, they have to take a
long-term view. Otherwise, it gets too speculative.
Malaysia Smelting may reinstate dividend on improving earnings, but risks remain
Malaysia Smelting Corp’s facility in Penang sits on what could well be
prime seafront land one day. Hidden behind concrete walls topped with
barbed wire, and located close to the Penang Bridge, it started out more
than a century ago processing tin ore from mines in Perak and Selangor.
These days, MSC has a much wider global network. On a sunny afternoon
in June, bags of tin ore from mines in Congo, Rwanda, Bolivia, Myanmar,
China and Mongolia were piled chest high on the floor of the plant. Out
in the yard, neat stacks of shiny tin ingots waiting to be shipped out
gleamed in the sunlight.
Chua Cheong Yong, CEO of MSC, says the company’s financial results are
regaining their shine too, thanks to a sharper focus on its traditional
tin smelting business in the last couple of years. However, growing that
business over the long term is becoming more difficult, because of the
increasingly limited supply of tin ore.
Malaysia’s tin mining business pretty much died in the mid-1980s, amid a
slump in tin prices just as the country’s once-rich alluvial deposits
were almost exhausted. A decade ago, MSC began trying to move upstream
to secure its own supply of tin ore. In 2002, it took a 75% stake in
Indonesia’s PT Koba Tin, which has a mine on Bangka Island. Two years
later, in 2004, it acquired Rahman Hydraulic Tin, which operates
Malaysia’s largest open-pit alluvial tin mine.
MSC also made a bid to expand into other commodities. In 2007, it
bought stakes in mines in Australia, Canada, Indonesia and the
Philippines that produce copper, gold, zinc, silver, nickel and coal.
Its timing couldn’t have been worse. The following year, commodity
prices collapsed in the wake of the global financial crisis. In
addition, the family of the late Tan Chin Tuan tightened their grip on
The Straits Trading Company, which controls MSC, and embarked on a
strategic review of the whole group.
MSC was directed to focus on tin, and it promptly began offloading the
non-tin mining assets it had only just acquired. Then, in 2012, PT Koba
Tin ran into trouble when it failed to extend its contract for work, in
spite of renewal guarantees. The Indonesian government also hiked export
duties on tin ore from 5% to 30%. MSC decided it wasn’t worth hanging
on to PT Koba Tin, and sold its stake in June.
The silver lining is that the string of impairment losses that MSC
suffered over the last few years will finally come to an end. “By June,
we would have taken out most of the hit,” Chua tells The Edge Singapore.
“Now, operations will be very much driven by smelting, marketing and
trading and [tin] mines, which have shown resilience in riding the
downturn. We need to build up confidence again.”
In 1Q2014, MSC reported a 2% decline in earnings to RM14.7 million on a
2% rise in revenue to RM429 million. The company hasn’t declared a
dividend since 2012, but that could change soon. “We are looking to
distribute dividends again,” says Chua. “In the short to medium term, we
are looking to stabilisation. In the mid to long term, there is
potential to develop.”
Expansion plans
How does Chua plan to grow the company? One idea is to broaden MSC’s
business to include tantalum and tungsten, which are related to tin.
“The market for tantalum and tungsten is one third or a quarter the size
of tin, but their valuation is good. They occur together and share the
same supply network. There is nothing to stop us from trading tantalum
and tungsten since we have a strong marketing network in the
Asia-Pacific,” he says. “They will support our mid- to long-term
growth.”
Chua also wants to expand MSC’s tin mining operations. However, after
its unpleasant experience in Indonesia, he says MSC will focus on
Malaysia and “regionally accessible and more-friendly countries”.
Notably, it has carefully nurtured Rahman Hydraulic Tin into a money
spinner. The 107-year-old mine was losing money when MSC bought it a
decade ago. Last year, it made RM34 million ($13.3 million) before tax,
up 17%. Now, it is poised to grow bigger. In March, Rahman Hydraulic Tin
acquired an 80% stake in SL Tin, which holds a mining concession in the
state of Pahang.
MSC has also been laying the ground to secure mining concessions in the
strife-torn Republic of Congo. While the United Nations has introduced
sanctions to cut off funding to rebels fighting the government, MSC has
initiated a scheme to certify non-conflict tin from the country.
According to Chua, tin produced in Congo is now traceable each step of
the way from source to smelter. MSC itself has been audited three times,
the last audit being in May. MSC also owns a 40% stake in a smelting
plant in Lubumbashi.
Much of Congo’s tin is produced by artisanal miners, who lack the
resources to make big investments to increase production in an
environmentally sustainable way. However, Chua is hoping the day will
come when the Congo government allows big mining companies to gain
access to its mineral resources. “Africa has huge potential if we get
our strategy right and the government does not sway away from
development,” he says.
Long-term risks
Chua joined MSC right out of university some 30 years ago. Among his
earliest tasks at the company was buying tin ore from miners in Taiping,
in the state of Perak. He worked his way up the ranks, and was
appointed CEO on Dec 31 last year.
Looking ahead, Chua is candid about the risks MSC faces. While the
company is working to secure as much supply of tin ore as possible, he
says tin producing countries will eventually want to set up their own
smelters and take control of their mines. “Resource nationalism is very
real today,” Chua says. “We have to take a view on tin price and
sovereign risk before we go into a project.”
Some market watchers also fear that MSC’s controlling shareholder has
little appetite to fund major acquisitions. They point out that
Australia-listed Kasbah Resources, which has the most advanced of tin
projects in the pipeline, is currently trying to raise some US$100
million ($124.5 million) but failed to get MSC to come in as an
investor. Kasbah Resources’ shareholders include International Finance
Corp, Toyota Tsusho and Thai smelter Thaisarco.
When approached for comment, however, a spokeswoman for Straits Trading
says the group wants to see MSC grow. “Straits Trading will support MSC
in any initiatives that will create value for shareholders,” she tells
The Edge Singapore. “Straits Trading will be supportive of MSC in its
quest to enhance its position in the tin industry.”
Whatever the case, with MSC on the road to profitability and likely to
reinstate its dividend, its shareholders are likely to see better times
ahead. And, even if the company’s tin business doesn’t grow much, the
land it occupies in Penang will certainly rise in value over time.
The Edge Publishing Pte Ltd
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