Cao Yanghui: Lack of speculation within lead ingot market under China’s "new normal" economic environment

Asian Metal: Recently, prices of oil and iron ore, two of the basic industrial raw materials, have tumbled. Most market analysts believe this situation is caused by ever-expanding capacity, but the price of the two products have witnessed an almost synchronous decline. Could this be a sign of slowing global economic growth prospects? Are potential changes afoot in the global economic growth arena?

Cao Yanghui: The decline in the price of oil and iron ore does indeed have a close relationship with the slowing down of global growth prospects. The global economic conditions can accurately be summed up by saying that it is the new normal. The European and United States economies are still in recovery, while China's economy is slowing down gradually, adapting to the new normal. I think there is much in common between the market and adapting to the new normal. However, excepting the economic factors, the downward price movement has mainly been caused by supply and demand alone. In terms of oil, the growth in global consumer demand is slow, but there is a kind of game going on as to whether the supply end will cut production in response to the low oil prices. I think there is little probability we will see the various major oil production companies reducing output. On the one hand, they are hoping others will reduce production in order that they can grab market share; on the other hand, the oil industry is a pillar industry in many countries, and in the wake of a global economic downturn, in order to maintain local economic development, they are showing little intention of reducing production. This is especially true with iron ore, with several major mines still sparing no effort to expand capacity. As the largest consumer within the iron and steel industry, China is undergoing a serious adjustment; the consequences of severe steel overcapacity have come to the fore in the past two years, future demand for iron ore will be far less than in previous years, so the ore will inevitably face an oversupply situation. It should be said that the imbalance between supply and demand is the main reason for continuous downward price movement.

Asian Metal: Recently, the price of nonferrous metals has been low, and with those of aluminum and lead well down and even approaching production costs, there has been support for the two products’ prices. But looking towards the mid-long term, there is still a downward expectation regarding the price of gold and silver. Should gold and silver prices slide further, will the production cost still offer such strong support to lead and aluminum prices?

Cao Yanghui: As gold and silver are the main associated products when producing lead and zinc, when the price of lead and zinc is low, companies can use sales of gold and silver to supplement their income. With gold and silver prices expected to continue falling, byproduct earnings will be reduced, enterprises’ overall income will go down, and production pressures will increase; at the same time, the support for costs may become relatively stronger. But I think that cost is not an effective support of commodity prices, and the situation where the goods are low in relation to the cost price is quite often seen. Normally, as long as the cash commodity prices can cover the enterprise production cost or variable cost, companies will continue to produce; however, when they are below variable cost, the enterprise will be considering whether to cut its production or shut down. So the support of prices in the case of aluminum and lead is not generally said to be the cost, the full cost, but rather it is the variable cost.

Asian Metal: Given the current situation, there are few factors capable of promoting a recovery in China's economic growth, and there are limited factors to support non-ferrous metal prices rebounding. In your opinion, what are the factors that will impact the price of copper, aluminum, lead, zinc and other commodities? What are your thoughts on the price trend for lead ingots during the fourth quarter?

Cao Yanghui: I think there are two aspects that will affect prices of non-ferrous metals during the fourth quarter. One is the policy side, mainly monetary policy; the other is their own supply and demand. From a policy perspective, on the evening of November 21, the Central Bank unexpectedly announced it would cut interest rates; around that time central banks in several countries decided to take action, seemingly setting off a wave of global easing. The changes in policy undoubtedly lent positive support to the market. But from the point of view of various commodities’ own supply and demand, it is a different situation. In the fourth-quarter, the base metals such as copper, aluminum and zinc are in their traditional off-season, demand is flat, and without significant reductions in the supply, they are still under pressure. However, lead is in a seasonal demand peak, so the demand-pull power is slightly stronger than for some other products. So overall, I think these metals still [range bound ?] trend in the fourth quarter.

Asian Metal: When the price of lead ingots has been low in the spot market during the past year, it has often coincided with a peak in deals, but this did not appear to happen in November, and despite the consumption of lead ingots within the market showing slight signs of improvement, downstream customers lacked any confidence in lead prices rebounding, while the tight capital situation of downstream businesses had become worse. What impact do you think this situation will have on the latest futures market prices for lead ingots?

Cao Yanghui: Although currently demand within the lead market has improved slightly, the market is indeed lacking the motivation to rebound. Despite the Central Bank cutting interest rates, in tandem with introducing the Finance Article 10 of the State Council, whose aim was also to alleviate the financing problem of small micro-enterprises, in the short term, it will be difficult to solve the tough financial situation faced by enterprises, so the market still has a certain pressure. In addition, the overall macroeconomic trend continues to be a steady slowdown, and this background also makes it difficult for lead prices to acquire the impetus to recover.

Asian Metal: According to Asian Metal statistics, in the past two years, Chinese lead ingot production increased by less than 7%, whereas the increase in domestic demand for lead ingots remained at 10-11%, meaning the increase in demand is much greater than output growth. Over the past two years, the lead stocks of lead smelting and downstream battery companies have fallen sharply, so domestic companies didn’t feel the extent to which the lead ingots supply was outstripped by demand. Currently, there is almost no room for lead ingot stocks to decline at both battery enterprises and smelting companies, and potentially lead ingot supply will fall well short of demand in 2015. Lead ingots are a niche product, and given they are domestically in short supply, is there a possibility of prices for lead ingots rising sharply? And in the futures market, will the lead market be the subject of speculation?

Cao Yanghui: It is generally expected that the potential for short supply in the lead market will be great in 2015, but this situation should viewed alongside the global market. In terms of the domestic market, I think there is little potential for short supply due to the high tariffs on imports and exports of lead products, so with the domestic lead market mainly in a self-sufficient situation, import and export volumes are very small, they are basically negligible. In terms of the international market, the potential for short supply is high, which will offer good support for LME lead prices, eventually maybe transferring to the domestic market. In general, there may be a relatively weak domestic situation when comparing with foreign markets; the market speculation on short supply mightn’t be so strong, as this market expectation has already been formed.