Xie Xu: Macro economy improves, zinc prices likely to keep increasing in H2

Asian Metal: Thank you for accepting the interview from Asian Metal. Recently, economic data in many countries has gradually improved and the FRB announced the continuation of QE. What do you think of the current influences on zinc price trends from the macro economy?

Xie: Generally speaking, the global macro economy is on an upward trend. The economic recovery in the US has regathered some pace after the bitterly cold weather earlier this year, especially the non-agriculture industries with 288,000 jobs added in June and the unemployment rate down to 6.1%, the lowest figure since September 2008; the manufacturing PMI has stayed above 50 and kept increasing, indicating an expanding manufacturing industry; the strong housing market is also a driver of the US economic recovery; prices have continued to rise and CPI reached the inflation target of 2% in April and May, higher than expectations. All these indicators confirmed that the US economic recovery has returned to full strength. The Euro Zone has continued to improve at a slow and steady pace since Q3, 2013, but unemployment rates remained at a high level with 11.6% recorded in May, although this was lower than the record low of 12%. Furthermore, another risk is the deflation in this region as the CPI growth rate was only 0.5% in May. These will hinder the economic recovery in the area. In terms of China, all economic indicators started to turn around in May, demonstrating the effects of the micro stimulus issued earlier this year. The most obvious change was that the HSBC manufacturing PMI increased to 50.7 in June, marking a record high over the past seven months. This also indicated that expansion in the industry had started. The recent speech of premier Li Keqiang also injected confidence into the Chinese economic recovery, noting that growth of 7.5% will definitely be achieved this year.

As for macro policies, the US monetary policy is tightening and QE should be finished before the end of the year at the rate-setting meeting in October or December; expectations of increasing rates have improved following the stronger economic recovery in the US, and I think it will happen by next year at latest. The Eurozone has implemented wholesale rate reductions and is preparing for European QE to cope with deflation. However, I think that the implementation of QE will be difficult in this region due to strong opposition from Germany, with the general monetary policy relaxed. The Chinese government has rolled out its ongoing micro stimulus, including the oriented reserve ratio reduction which strongly stimulated the Chinese economy. It is expected that the steady but relaxed micro stimulus will continue in H2 for targeted regulation.

In general, the global macro economy is on an upward trend and will continue to improve in H2. More positive information than negative will support zinc prices.

Asian Metal: What do you think about economic trends for H2?

Xie: I believe that the global economy will improve further in H2 and the market will see more positive factors than negative ones. The US economy is undergoing a strong recovery and QE will be withdrawn completely before the end of this year. However, any rise in interest rates will occur the following year; the Euro Zone economy will maintain steady growth and the recovery will further improve under the ultra-loose environment of comprehensive interest rate reductions; the economy in China will see slow but steady growth with a low probability of any drastic changes; the economic transformation will continue alongside hardship and positive and steady policies will continue to be loose with controlled inflation throughout year. This means there is a high probability of the annual economic growth target of 7.5% being fulfilled. Therefore, we should adopt a cautiously optimistic attitude towards the economic situation for H2.

Asian Metal: Demand from downstream zinc markets is still weak, but zinc prices have continued to rise in the past few months. What do you think about this?

Xie: In truth, the new round of zinc price rises started at the beginning of June, the key factor being that the increasingly limited supply provided a boost for funds. Sought out by the funds, sales and stockpiling have increased and recorded new two-year highs. According to the latest data from ILZSG, global zinc supply saw a shortage of 107,000 tonnes in Jan-Apr compared with an oversupply of 32,000 tonnes in the same period last year, caused by suspended or reduced production at some of the world’s major mines. The zinc ore market should witness this trend of reduced production in the next three years, while the growth in demand for zinc is set to be strong, resulting in the supply gap further enlarging. Meanwhile, the improvements in the macro-environment have supported zinc prices as well. These factors all supported the round of zinc price increases.

Asian Metal: We’re in the typical off-season now and demand for zinc from downstream markets in China gradually wanes. What is your view on the supply and demand situation in the Chinese domestic zinc market?

Xie: The aggregate domestic supply of refined zinc has increased slightly. According to data from NBS, outputs of refined zinc totaled 1.3556 million tonnes in Mar-May, a marginal rise of 0.5% year-on-year; those of zinc concentrate amounted to 1.4732 million tonnes in Mar-May, a decrease of 4.9% YOY. According to import & export data released by the General Administration of Customs, general import volumes for zinc concentrate were 311,000 tonnes in Jan-May, increasing by 27.5% over the same period last year; export volumes for the material were 1,012 tonnes in Jan-May, a significant reduction of 43.1% year-on-year, with the figure only 2 tonnes in February and zero exports in March. The net import volumes were 309,960 tonnes in Jan-May, an increase of 28% YOY.

Judging from downstream consumption, it is the typical off-season in July and August when demand is unlikely to recover. The galvanized industry was flat, and many zinc-plate factories suspended production due to environmental protection checks in Hebei and Shandong. From the perspective of end consumption, first to be affected was the real estate market. The government had made considerable achievements in housing price control over several years with callback at high levels this year, and investment growth in the sector declined significantly, which would depress the demand for zinc. The auto market has remained strong since the beginning of this year, with good production and sales in the first five months. According to data from RGL, auto industry production and sales in China between Jan-May increased by 9.4% and 9% respectively, representing rapid growth. Production and sales are expected to decline in July and August when it is the off-season.

So the supply and demand situation is unlikely to improve in the Chinese zinc market during the off-season in Jul-Aug. The market will likely be flat, with limited support for zinc prices.

Asian Metal: Generally speaking, H2, especially Q4, is a busy season for consumption and all enterprises will enter their peak period for production. Given this situation, what do you think about zinc price trends and what’s the outlook for the zinc market?

Xie: Many industries including real estate, car and household appliances will enter their busy season in Sep-Oct. China has made some achievements in real estate adjustments and will not change the long-term measures but there will be some loosening of policies at that time, such as relaxing loan policies for first home buyers. After all, the aim of government in adjusting the real estate industry is to keep it stable rather than depressing it, so it will be worthwhile waiting for the busy season this year. The auto industry has performed well in terms of both production and sales since early 2014, and the belief is it will be stronger during the busy season in the autumn. End demand will improve slightly this year, supporting zinc prices. However, the support will be limited, only fueling the potential increase.

It is players’ hype around the supply shortage that is behind the zinc rises. We should focus on whether the international supply shortage will deepen. It is expected that supply will remain deficient globally over the coming 2-3 years. The global macroeconomic situation will heat up further, forcing zinc prices up as well. The Chinese micro stimulus policy is also an important focus. It is expected that China will release micro stimulus policies, including measures to support railways, infrastructure and shantytown renovation, which will further boost downstream zinc demand.

In a word, zinc prices will keep fluctuating with positive trends in the middle and long term. The first price goal is around RMB17,000/t (USD2,751/t).

Asian Metal: Some departments anticipated that the El Nino phenomenon may bring extreme weather like severe flooding or drought to major metal producing countries, impacting mining production and transportation significantly, and as a result, some metal prices, including those for copper, silver, zinc and nickel are likely to rise. What’s your opinion on this analysis?

Xie: There is a possibility of this happening. If a serious El Nino phenomenon does occur, mining production in the major producing countries - Chile, Peru and Indonesia in particular - will be significantly depressed, resulting in tighter supply. So if demand remains unchanged or only changes slightly, prices will be pushed up. There is a great possibility we could suffer from the El Nino phenomenon right now. In such a situation, it would be prudent to cut back on production. As for zinc, the demand exceeding supply has created a favorable situation and the potential weather influence will only boost the price hikes further. However, the El Nino phenomenon is only speculation, and it will not have any influence for the time being. It is merely a possibility.