Ma Jian: cautiously optimistic about zinc prices in H2 with continuing focus on demand and supply in China

Asian Metal: Thank you very much for accepting the interview. Would you like to talk about the global economic environment, especially in China, the US and Europe?

Ma: From the point of view of the global economic environment, we should pay attention to two indicators of bulk commodities: the US dollar index and gold price trends. These twin indicators reflect that the global economic environment has improved since H2 last year. Gold prices stayed at a low level at the beginning and end of the period instead of continually increasing as in previous years, symbolizing the relative strength of the US dollar. The economy of the US was alone among the major global economic powers in witnessing economic growth, having become the leader of global economic recovery since the financial crisis broke out in 2008. This signaled that the economy in the US had started to rebound, which wasn’t the case in China and Europe.

Economic structural adjustments in China and Europe had not yet been finished. All the data on employment rates, PMI and the public financial deficit remained at low levels in Europe. Generally speaking, the European central banks were required to lower interest rates further in order to boost the economy. In addition, China introduced initiatives to regulate and control its own economy. With regard to GDP, investment data and export data, the processing industry had not yet stabilized in the wake of the current economic structural adjustments, due to RMB appreciation previously. Investment data in China also declined compared with previous months, and GDP stayed at around 7.5 as there hadn’t been any financial stimulus policies during the past two years, unlike in 2008. It was clear to see that the economic structural adjustments had not been completed. Generally speaking, the economy in the US was the only one with growth, while the outlook in China and Europe remained poor.

Asian Metal: NPC and CPPCC have just ended in March. What influence do you think the two sessions will have on the domestic nonferrous industry, especially the zinc market?

Ma: From the government transition, we could see that both the governments had taken measures to solve the problem of over capacity, which had influenced the nonferrous industry to some degree. In addition, MIIT didn’t at first list the zinc industry on the over capacity industries list for this year, symbolizing that over capacity in the zinc industry was not so severe as in other industries and instead remained flat. Hence, the two sessions just ended have not influenced the zinc industry significantly.

Asian Metal: What do you think is behind the continuing sluggishness of the zinc market?

Ma: Major downstream industries, such as the steel (galvanized plate), real estate and automotive industries, have been up and down over the past two years. The overall development of the iron and steel industry is influenced by national environmental protection policies and excessive production capacity. The automotive industry is also in a downward trend from the topmost demand. In light of national environmental protection policies, demand and supply of automobiles has been impacted considerably, with declining demand for cars due to automobile restriction policies in large cities, as well as limited demand in small and medium cities. In general, overall growth has slowed, despite increasing demand for automobiles, which has influenced demand for zinc to a certain extent.

The zinc industry in the international market is faring quite well in terms of global demand. From the perspective of global demand and supply, both demand and output of zinc ingots in international markets have changed subtly, forming a reliable basis for our optimism about international zinc prices in H2 of this year. Zinc inventories have concentrated in China, rather than the international market, while that in the LME has been in rapid decline over the past two months, indicating a considerable improvement in demand amid rapid de-stocking in the market. In addition, a supply shortage has occurred in some parts of the market. However, the zinc inventory keeps increasing in China, mainly due to lower galvanized plate prices and sluggish demand. Driven by these two factors, there is a sharp differentiation between zinc prices in the international and Chinese markets. Prices in international markets are in an uptrend after previous adjustments, while those in China remain at relatively low levels.

Asian Metal: The zinc market in general showed a gradual improvement from March, but hasn’t picked up noticeably since then. Can the zinc market improve from its weak status in Q2?

Ma: It will be relatively easy for zinc prices to pick up in the international market, but they are largely unlikely to shrug off their low performance levels during Q2 in China in light of the macro-control strength and micro-adjustments in policies. As policy adjustments will not be quick in China, a considerable rebound won’t be possible while the industry depends on improvements in its own fundamentals (inventory and spot demand). In fact, it is the peak season for zinc ingot consumption in Q3, as participants are still consuming their own stocks in Q2. Participants generally replenish stockpiles in late Q2 and early Q3. Seen from the fundamentals in China, zinc prices are fairly likely to pick up in Q3.

Asian Metal: Some zinc smelters overhauled equipment in advance this year. What do you think are the causes?

Ma: Zinc smelters overhauled equipment in advance mainly due to the weakness of the whole industry and soft prices. Although zinc prices rebounded in the first quarter, they fell back rapidly afterwards, so figures fluctuated at the bottom without any uptrend. Hence, downstream enterprises overhauled their equipment or halted production to avoid further losses, and for the whole industry, maintenance or production halts were expected to push up prices. From another point of view, zinc has certain financial features, and the price trend for zinc ingots does not completely depend on the relation between supply and demand, as the material is a tool for financing sometimes. So prices for zinc ingots are rising in spite of rather large stocks globally, as many inventories are locked as financing tools rather than covering actual demand in the market — which is different from China, which focuses on actual demand.

Asian Metal: Reportedly, more and more downstream zinc consuming industries like those for zinc oxide have turned to production using crude zinc ingots or zinc scrap. Do these alternatives have an impact on the zinc ingot market?

Ma: The influence is limited. Prices for refined zinc remain at relatively high levels and consumption of crude zinc is considerable, but the applications and process techniques of the two materials are different, and finished products also differ, so the two materials are not alternatives to each other, rather they are complementary products. Moreover, consumption of zinc ingots in the zinc oxide and zinc powder industries is limited, so the refined zinc market is not impacted significantly, despite the fact that some enterprises purchase crude zinc or zinc scrap as raw materials.

Asian Metal: The supply of crude zinc has been declining in the past two years, and production halts at some crude zinc processors have made procurement from consumers difficult. What do you think about these cuts in production at crude zinc processing enterprises?

Ma: Most crude zinc plants or galvanizing plants are located in North China, especially Hebei. The crude zinc and galvanizing industries are faced with stricter and stricter environmental protection, as the lead and zinc industries are heavy polluters. Crude zinc enterprises should indeed be cracked down upon or restricted, as the production of crude zinc, in particular, involves rough machining, which is responsible for more severe environmental destruction. So I think it is not too much to shut down those small-scaled companies or force them to reduce production. The measure is necessary for environmental rehabilitation and will be favorable for the sound development of the market, while avoiding wasting resources. Additionally, domestic industries are in the process of technical transformation, and the lead and zinc industries should witness an upgrade in techniques and processing and no longer be low-end industries. At present, most enterprises have accepted the transformation, so the reduced supply of crude zinc has had a limited impact on the whole market.

Asian Metal: China's environmental inspections are becoming more and more strict, especially for the galvanizing industry. Some small galvanizing and crude zinc factories have been ordered to stop production and mid-scale plants also shut down intermittently. What do you think the impact will be on the market?

Ma: The environmental inspections have only had an influence on the smaller plants. Actually, most medium and large-sized galvanizing and crude zinc plants in Guangxi and Northwest China were not overly influenced by them. And I think China paying more attention to environmental protection will promote significant development in the recycling industry.

Asian Metal: Most market participants believed that zinc prices would fluctuate at low levels in H1 of 2014 and they still have the same expectations for H2. What do you think about the price trend in H2?

Ma: According to the price trends in the past two years, we can learn that zinc prices have been low for two years, slightly fluctuating within a certain range. The international zinc price is under slightly heavier pressure. Should it exceed USD2,200/t, the rising space for low-end zinc prices will reach USD2,600/t, a high point previously seen in 2010. However, there is little chance of this prediction coming true given global stock consumption currently. But it is still possible the low end price will reach as high as USD2,200/t in Q2 or H2 if current stock consumption continues. The potential price breakthrough depends on cooperation between inventory decreases and downstream demand level. Otherwise, zinc prices will continue hovering between USD1,800-2,200/t.

In general, there still exists a possibility we will see the zinc price increasing to above USD2,200/t as it has accumulated energy for hikes following two years of low-level fluctuations, and it is likely we will see this happen in Q3 if supplies remain tight in the international market. However, depreciation of RMB against the US dollar has played a big role in depressing zinc prices, and is viewed as a large potential block on price rises, indicating that general demand for zinc has not improved noticeably in China, so we can’t be over optimistic.