Liu Biyuan: Zinc supply and demand pattern is changing, prices in strong position in medium and long-term

Asian Metal: Zinc’s performance has exceeded that of other base metals this year, with prices rising strongly in June and July and shaking off the declining tendencies of the past three years. Do you think this is disrupting the regular market development and is it only caused by fund speculations?

Liu: I don’t think so. Several zinc mines are set to close and zinc supply will undergo a periodical change. Many zinc mines are faced with the problem of aging. We have focused on a number of mines’ concrete operations and found that in many the grade of zinc has declined and they may close in the near future. Any newly created zinc mine capacity will be much less than the closing capacity from 2014-2016, and this situation will unfold over the next 2-3 years.

In addition, Chinese zinc prices have stayed below production costs for three years, so zinc mines have lacked the momentum to exploit new projects and expand capacity. Although zinc prices went up recently, reaching considerable highs, the mines need to be observed closely over this period.

Asian Metal: Will the issue of zinc mines closing lead to further hype?

Liu: There are some uncertainties, but it’s already within a predictable range, so I think zinc demand will have a stronger impact on the price trend. If zinc consumption improves, zinc prices may climb considerably, but this is a long process.

Asian Metal: What about Chinese zinc consumption in 2014?

Liu: Chinese zinc ingot consumption isn’t bad, as demand from the galvanized steel sheet and ship industries is increasing, while that from the overseas market has also improved, so export orders are on the increase. However, the Chinese real estate industry is performing poorly, hindering the growth in zinc demand.

Asian Metal: Chinese steel prices slumped during August, leading to output reductions at galvanizing plants. What’s the effect been on the zinc market?

Liu: This will directly lead to decreasing demand on the zinc market. The steel price decline came about because of the sluggish real estate market. Many enterprises are lacking funds, which is something we must pay attention to.

Asian Metal: Can we say that the zinc market has moved away from the bear market over the past few years? What elements will affect zinc price trends in the future?

Liu: I think the zinc market has touched the bottom. The supply shortage won’t be solved in the short term, so zinc price trends will depend on demand prospects. The steady growth in zinc demand will support zinc prices. However, if zinc demand softens and the demand decline is larger than the supply decline, zinc prices will continue to stay at low levels.

Asian Metal: The seasonal characteristics haven’t been much in evidence during “gold September and silver October” in the past few years, and the market has been flat this September. Are there any factors which can push zinc prices up in the fourth quarter?

Liu: This comes back to fundamentals. Zinc mine shortages and declining stocks have become the consensus, so the prospects for zinc prices will be positive if zinc demand improves. In the second half of this year, China will increase its investments in power grid construction, which will boost zinc demand. Furthermore, we need to pay close attention to whether the auto and real estate industries can improve in the fourth quarter. However, we have seen no new increases in other consumption areas beyond the traditional ones of automobiles, real estate, ships, tower construction and so on.

Asian Metal: The US economy is recovering steadily and European financial risks have decreased this year. What impact will these developments have on the Chinese metal market? Will China introduce further stimulus measures to boost the economy in the fourth quarter?

Liu: The overseas economies are running well this year, and there is less of a risk that problems will occur in the near future, which will surely be a favorable factor for the Chinese metal market. However, China is the largest metal consumption country in the world, so we should focus on the Chinese economy.

The Chinese economy is going through a period of reform, so easy monetary policies won’t be in full operation. China will mainly focus on micro or directional stimulus in the future. However, this is only our expectation, and I can’t guarantee it won’t change.

Asian Metal: China’s Qingdao port was investigated in June due to a repeat receipt pledge, and financial policies on imports were tightened afterwards. What are the prospects for the zinc import market?

Liu: Firstly, Chinese banks have tightened liquidity for metal financing purposes, and zinc importers are lacking financial support. Secondly, the ratio between zinc futures on the SHFE and LME remains low, and importers are suffering great losses, so I think the import market will slow down in the near future.

Asian Metal: There are widely divergent views on the current market. What do you think about zinc price trends?

Liu: We’re optimistic about zinc prices in the next 1-2 years as prices have reached the bottom. Zinc stocks remain high but they are declining, and I think zinc prices are more likely to go up.