The Subprime Lending Crisis - Essay Example

?Macro and Micro Economics Introduction The tin market has been severely affected in the financial crisis of 2008. Such was the impact that the market in the first and the second half of the 2008 were completely two different pictures (Asian Metal Ltd., 2008). The International Tin Research Institute is the organization which is committed to the overall development and expansion of the tin industry, which is mainly funded by smelters and producers (Kettle, 2013). This essay will concentrate on the prices of the tin industry, particularly during the financial crisis. The pricing of tin in three different periods of 2008-2009, 2009-2011 and 2011-2013 will be studied. The correlation between the housing and construction industry with the tin industry will be analyzed to reach the conclusion. The supply curve concept and its implication on the tin industry will be discussed in the essay. Tin Prices: 2008-2013 The following graph shows the prices of tin in the time period under study. Figure 1: Tin prices from 2008-2013 (Source: London Metal Exchange, 2013) 2008-2009: The chief reason for the fall in the price of tin in 2008 began with excess supply. The year began on a cheerful note when, in April 2008, prices of tin touched the highest mark of US $2600 per ton (Asian Metal Ltd, 2008). The movement in the price of the currency also determines the pricing of commodities. An appreciation in the price of dollars stimulates a fall in the price of dollar denominated commodities. This was particularly true in case of agricultural products and prices of base metals (Losoncz, 2008). The prices had been low mainly due to the subprime lending crisis in America and heightened during the period of September 2008. As tin is one of the most important requirements in housing and construction industry, so a fall in the demand for houses in that period had led to a decrease in the demand for tin, which resulted in excess supply in relation to demand, thereby lowering the prices. This can be explained with the help of a supply curve. Figure 2: Supply Curve (Source: Gillespie, 2001) The graph above is that of a supply curve which shows that whenever there is an excess supply, the prices of the commodities tend to fall (Gillespie, 2001). The arrows imply that the prices tend to fall when supply exceeds demand. The subprime lending crisis left the economy with vacant houses and no one to buy it. The banks stopped giving loans for housing constructions (Bianco, 2008). All these lowered the consumer demand for tin, a basic metal in construction and therefore, the prices fell. 2009-2011: The price of tin began to recover with the onset of 2009. The rebound in prices could be attributed to the weakening of dollar against other currencies (Lenzer, 2009). Deprecation in the price of dollars triggers the price of commodities in dollars and this caused the tin prices to rise. Another factor which leads to the rise in tin prices was the rising imports of tin from China. The growing demand of tin from overseas market was also responsible for the rise in the price of tin. Even the improving economical and financial outlook contributed to this rise in the prices. In the aftermath of the global financial crisis, the demand for tin already crashed in 2009 as per the records of World Bureau of Metal Statistics (Burns, 2012). The rise in price of tin during this period was somewhat paradoxical considering the other pressing issues at hand then. The industrial demand for raw material had fallen to a great extent in the advanced European countries. The consumption of tin in America alone rose from 4% to 6% when other industries felt the heat of the financial crisis. This happened mainly because of the rising production of tin to meet the rising production demands of steel cans (U.S. International Trade Commission, 2001). The reaction from the supply side followed quickly after the global crash in demand. This was evident from the fall in the production of tin from the miners and smelters. On the global level, the cuts in supply could partially match the fall in demand and this led to a large stock pile of the metal in the London Metal Exchange warehouse. The bottleneck of tin supply comes from the mining section of production (Adams, 2013). The fall in the exports of tin from Indonesia can also be held responsible for the fall in its supply (Burns, 2010). The supply side constraints can force an economy to run into deficit (Skoog, 2000). The variables of the demand side increase the forces on the supply side and prices rise as a result. In 2010, the squeezing of imports from Indonesia resulted in a drop of supply in exports by 14.5% (Burns, 2010). Two factors can be attributed for this fall in exports. They are, firstly, the banning of illegal mining and secondly, the depletion of the land reserves. In a nutshell, the producers are reluctant in raising the production because of the low prices or declining quality of the ores (Burns, 2010). 2011-2013: This time period had experienced wide fluctuations in the price of tin. The beginning of the year saw the price to be falling, whereas 2012 and 2013 prices had revealed volatility. This can be attributed to the European Debt Crisis and the fall in demand globally (Rusmana, 2012). The European debt crisis along with the slow rate of growth in China had resulted in sluggish demand for tin in soldering and packaging. The rising demand with limited supply of the product contributed to the occasional rise in the prices (Penn State University, 2013). The deepening of the European crisis in 2012 had led to further falling of demand and the prices also began to fall for maintaining equilibrium. In January 2013, prices had hit 11 month high due to rising expectations of increase in demand and shrinking production due to rising demand from the electronics industry (Terrazono, 2013). According to analysts, the demand will further improve as growth in China picks up in the recent years. Supply curve and tin prices The following curve represents the supply curve. Figure 3: Upward sloping supply curve (Source: Makiw, 1998) The law of supply states that the producers of goods and services are willing to bring more products into the market when they receive a higher price for their produce. At low prices, they bring lesser commodity to the market as the profits earned by them are reduced (Makiw, 1998). The equilibrium price is reached when the demand and supply curves intersect with one another (Blaug, 1997). This theory can be used to explain the fluctuations in the price of tin. The equilibrium analysis requires the following graph. Figure 4: Graph showing equilibrium analysis (Source: Edexcel GCE, 2006). The horizontal axis represents quantity and the vertical axis represents price of the commodity, in this case, tin. The initial equilibrium is represented by the intersection of demand and supply curves, which are marked as D and S, where initial price is Pe and initial quantity is Qe. The final equilibrium is represented by the intersection of the new demand and supply curves, D1 and S1, where quantity and prices have risen to Q1 and P1, respectively. This change in the demand and supply position of quantity of tin and the corresponding changes in the price can be explained as follows: Firstly, the great recession of 2008 had made the financial markets more volatile and investors had begun speculating in the commodity futures prices, resulting in the increase of prices. Research work has established that the high price of commodity futures is possibly connected to the housing bubble in America (Gilbert, 2009). The extrapolative expectations and index-based investment in commodity prices might have resulted in the rising metal prices, including tin. Secondly, lead soldering in electronics industry had suffered a huge setback due to austere environmental restrictions. The harmful effects of lead had led governments in most of the countries to put a ban on its use, which had resulted in the use of tin as an alternative. This saw an unprecedented rise in the demand of tin which in turn had contributed to the rise in tin prices (The Ames Labrotory, n.d.). Thirdly, the formidable size of China and its strong rising demand of tin, in excess of its production, had led to an increase in the price of the same (Bloomberg News, 2012). Finally, the squeezing of exports by Indonesia had greatly reduced the supply of tin, while the demand did not come down proportionately. This had also contributed to the fluctuations in the price of tin (Bloomberg, 2012). Conclusion This paper has dealt with the price of tin in the recent financial crisis. After a thorough analysis, it has been found that the fluctuating prices can be attributed to a host of factors. The depreciation of the US dollars combined with rising demand for tin from the electronic and steel can productions, have contributed to the rise in prices. The Indonesian action to squeeze exports of tin had also resulted in a significant impact on the tin prices. The volatility in prices can also be attributed to the speculation in the commodity futures prices throughout the period. The housing bubble that emerged in the American real estate industry can be linked to the speculative prices of the metal commodities. Reference List Adams, W., 2013. Tin Analysis and Forecast Q1 2013. [online] Available at: [Accessed 19 December 2013]. Asian Metal Ltd., 2008. Annual Report on Tin Market. [pdf] Asian Metal Ltd. Available at: [Accessed 19 December 2013]. Bianco, K. M., 2008. 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