Ma Xiaoxu: Outlook for Chinese economy depressed, lead prices see limited upticks in H2 of 2014

Asian Metal: In terms of the macro economy, what do you think about the FED’s monetary policy and recent economic data from Europe and the US, as well as the lead futures trend on the LME?

Ma: I will keep a close eye on whether the FED continues to curb its debt purchases, in the same way as it oversaw a decrease from USD55 billion to USD45 billion previously. Meanwhile, the FED will decide whether or not to increase interest rates, depending on its evaluation of the American economy. However, I predict there is little possibility of an increase. Housing starts and non-agriculture employment in April beat expectations, but the consumer confidence index fell back in the US. Therefore, the US economic data has recently seen both hopes and fears.

We should pay more attention to the economic policies in Europe as the would-be monetary easing policy from the European Central Bank will stimulate economic growth. It will be positive for the non-ferrous metal industry.

Currently, the economy is undergoing a recovery. Nonferrous metal prices will consolidate at low levels in the near future but will increase, while experiencing some fluctuations, in the mid-to-long term.

In terms of the fundamentals, the global lead market is relatively strong. There will still be a 23,000t of deficit within the global lead market in 2014, so lead futures are expected to increase to around USD2,300/t on the LME in the second half of 2014.

Asian Metal: The economic data released by China remained weak over the first few months of 2014, with no improvement by April and May. What do you think about the Chinese economy in H2 and will it show signs of further recovery?

Ma: I agree with the viewpoint of “four-phase superposition” proposed by some economists during the two sessions at the beginning of this year. The first phase was the economic growth deceleration period when the figure remained at around 7.5%, whereas it has been around 8-10% over the past few years, with the highest level being 14%. The second phase is a structural adjustment period focusing on overcapacity digestion and adjustments to industrial structures, which is expected to bring a negative influence to bear on some industries in the near future. The third phase is the deep water period of deepening reform. Premier Li Keqiang put forward in the government work report that this reform is facing difficulties at present. The fourth phase is a digestion period following the previous policies, as the two 4 trillion pump priming measures released by China will have brought about a negative influence on the Chinese economy. The Chinese economic situation is not looking positive this year as China goes through this period of four-phase superposition. However, we should not simply say that the Chinese economy is worsening but, instead, that the new government intends to slow economic growth and cure the malaise within the Chinese economy. The government plans to not only get at the root of the problem instead of offering a temporary solution, but also to adjust the unworkable industrial structure. It is aiming for faster and better development of the Chinese economy. Hence, we should realize a bright future for economic development awaits beyond the pessimistic sentiment. Chinese economic development is looking positive over the next 5-10 years.

Asian Metal: China’s stocks and futures market has appeared very strong since the State Council released its new “nine suggestions” in mid-May. What do you think of the policies? Will they have a positive influence on the nonferrous industry?

Ma: Compared with the old “nine suggestions”, the new ones strengthen the structure of the financial futures market, as well as creation of the security and futures industries. Combining the futures and spot markets is expected to boost the nonferrous metal trade and improve market liquidity. The policies will be implemented earlier than expected. Generally speaking, these policies are favorable for the nonferrous industry.

Asian Metal: MIIT recently began the task of eliminating outdated and excessive capacity for 2014. 115,000t of lead smelting capacity (including secondary lead) and 23.60 million KVAh of lead batteries (pole plate and assembly) will be eliminated. What do you think of lead demand-supply in China at present?

Ma: Eliminating outdated capacity may weigh more on the electrolytic aluminum and steel industries as the two industries have high capacities and gain more attention from the government. The lead converting and lead acid battery industries have very little influence on the Chinese lead market due to their smaller production scale and limited outdated capacity.

Asian Metal: The lead market in China is in its slack season in Q2. Do you think lead prices are likely to go up further when the electric bicycle storage battery industry gradually moves into the bullish season during June and July?

Ma: The dull lead market is closely related to the current economic situation in China. We are right in the peak season for non-ferrous metal consumption, including copper, aluminum, lead and zinc, in Q2 and Q3, but prices for aluminum, lead and zinc are all at low levels with some fluctuation — the exception being the high prices for copper. I believe that the non-ferrous metal industry will improve in terms of dealing activity moving into H2, but any increases in lead prices are expected to be very limited. However, lead prices are unlikely to move down further.

Raw material costs offer strong support for the prices of metals with low financial properties, such as aluminum, lead and zinc. Almost 90% of electrolytic aluminum plants across China will suffer losses if prices of the material drop below RMB13,000/t. In addition, lead prices almost bottom out when lead converting plants generally suffer losses. Most domestic plants are already under great pressure from such low lead processing fees. Lead ingot prices in the spot market in China are holding up at RMB13,500/t, offering significant support for the market.

Asian Metal: The lead futures contract on the SHFE has been cut from 25t/lot to 5t/lot for approximately one year. What do you think about the effect of this revision?

Ma: The revision of the Shanghai Lead Contract has been generally effective. It stimulated some small and medium investors to enter into the market but failed to meet with expectations. Dealing activity in lead lags far behind that for copper and zinc. With limited speculators and high levels of lead ingot production, both consumption and trading enterprises will continue to participate very little in Shanghai lead trading.

Asian Metal: What do you think of the Chinese lead market outlook in H2?

Ma: Chinese economic prospects remain unpromising over the coming months, but the bullish season for lead ingot consumption will come in the third and fourth quarters, so I predict that lead prices may remain on a slightly upward path in the Chinese market during the second half of 2014, but there will only be limited room for the prices to rise. Lead ingot prices are expected to pick up to approximately RMB14,500/t on the Chinese spot market in the second half of this year.