Asian Metal: The Federal Reserve is likely to raise interest rates in mid-2015, but China and Japan are expected to ease monetary policy further. In your opinion, what these monetary policies will impact on commodities?

Liu: I think the monetary policy involves two aspects. On the one hand, a loose monetary policy will promote loose monetary policy. More funds will flow into the market, which will boost loans, financing and consumer interest. The operating rates of plants will also rise with recovering market demand, resulting in higher employment rates and higher wages. Consequently, people with more household disposable income can spend more on consumption. In terms of how the above process is carried out, we can see that loose monetary policy will stimulate economic growth — a good example is the Fed’s QE — but we should note that the process will take some time to complete. On the other hand, commodity prices will drop if the Fed raises interest rates, which will reduce the profit. Although the Federal Reserve is indicating that the American economy is strong and demand for commodities will increase when interest rates are raised, the commodity prices will be subject to influences from the global market. So the profits in commodities will witness further decline, especially when other countries carry out loose monetary policies, which will force the dollar to appreciate.

Therefore, the loose monetary policy The influence of rising interest rates is more quickly felt on the financial markets than in the wider economy, so the downward pressure on commodity prices will appear quickly.

Asian Metal: At the beginning of 2015, the prices of copper and crude oil fell sharply, while the zinc treatment charges increased. As a result, people’s confidence in the zinc market fell slightly. What’s your opinion on the copper price trend, and how will it affect the zinc price trend?

Liu: Copper price is not expected to move up significantly. Although recently some institutions lowered their forecast for copper supply in 2015, the demand from China is still a critical factor in copper price trends as China is the largest copper consumer in the world. Currently, the Chinese government is implementing loose fiscal and monetary policies under great pressure from the economic downturn. However, the investments in infrastructure can’t replace investments in real estate, because the former can’t stimulate the subsequent consumption, such as demand for TVs. There is more capital in the market because the government in China has eased monetary policy. However, the economy as a whole will scarcely benefit from this measure, so the copper price isn’t expected to move up greatly, and in general it is likely to witness a reduction.

The overall outlook for the zinc market remains relatively good. The zinc price may fluctuate because recently lead and zinc prices have rebounded strongly. However, the zinc price will go up on the whole due to reduced supply. Zinc prices show a greater increase in Q3 as a result of several zinc mine closures in Q2. But it is difficult to predict whether the market price will show an upward trend any earlier. Macroeconomic policies will provide relatively little support for the zinc price, just as they do for the copper price.

Asian Metal: The treatment charges for zinc concentrate in annual contracts have increased by 10% to USD245/t this year, and the treatment charges for imported zinc concentrate in the spot market have also risen continuously and have now climbed to USD200-210/t. Do you think the upward trend of zinc treatment charges contradicts treatment charges contradicts of a zinc supply shortage?

Liu: The treatment charges are in fact dependent on whether the supply of zinc ore and demand from smelters can achieve a balance. Domestic environmental requirements are becoming stricter, which is having a serious effect on zinc smelters. Some small smelters began shutting down in Q4 of 2014, reducing the demand for zinc from smelters. In addition, the production capacity of domestic zinc mines was on the increase in 2014, reducing the dependence on foreign ores. The treatment charges rose as a consequence. Zinc supply is expected to become more restricted, mainly because of the closure of zinc mines in Australia and Ireland with a reported output reduction of 670,000t. The supply shortage will be compensated for by the zinc ores from other zinc mines, so the shortage will be far less than 670,000t. In fact, the latest data from ILZSG showed that the supply surplus has increased to 43,400t in February. Therefore, the increase in treatment charges doesn’t contradict the shortage of zinc supply. End users anticipate that the zinc market is likely to witness a supply shortage because they are worried about the production capacity following the closure of the large zinc mines. This supply problem won’t occur until after June, and the rise in treatment charges is caused by the imbalance between the supply of zinc ore and demand from smelters.

Asian Metal: The “One Belt and One Road” initiative was launched by China in late March. How will this initiative affect the consumption of copper, zinc and other metals?

Liu: Judging from its concept, this initiative will benefit the base metals. The formation of economic zones and establishment of trading ports will not only increase the flow of people and goods, but also promote infrastructure investments, as well as other related investments, increasing the demand for base metals.

Asian Metal: Recently, some downstream galvanizing plants were forced to shut down due to environment protection inspections in northern China, affecting the consumption of zinc ingots. In addition, several zinc smelters halted production for maintenance. What are your thoughts about the zinc market fundamentals of supply and demand at present?

Liu: Chinese zinc smelters have started their maintenance, which is good news for the zinc market in terms of supply in the short term. It is said that the environmental protection checks are unlikely to stop until May, affecting market demand in the short run. In fact, the zinc supply will not show a significant increase, as smelters have stronger control over the maintenance schedule, and won’t suspend or reduce production for a long period. The recent environmental protection checks, which only a few of the plants passed, have had a significant effect on the downstream galvanizing plants. However, these plants are sure to introduce some equipment which can meet the environmental protection requirements, so the so-called “environmental protection storm” is probably media hype, and the short-term negative effects will be offset by the smelting plants’ overhauls. There is a relatively small possibility of zinc prices dropping sharply under the short term influence from fundamentals.

Asian Metal: Chinese zinc ingot exports increased significantly in H2 of 2014. Will the export market witness the same situation this year?

Liu: There were several reasons which accounted for the rise in exports, such as the abundant supply in the domestic market and the supply shortage in some foreign countries, and the increase of export earnings with dollar appreciation. The regional imbalance between supply and demand will continue with mine closures abroad and domestic output on the increase. Exports of zinc ingots will keep rising as domestic refined zinc production goes up.

Asian Metal: What’s your view on the zinc price trend on the LME and the Chinese market? And do you think there will be any chances for SHFE-LME arbitrage?

Liu: The room for zinc prices to go up is is expected to be limited in Q2, while the chance of a zinc price rise in Q3 is greater because by then the foreign zinc mines will have closed and the impact of fiscal policy on investment will also have been felt by the downstream market. The opportunities for SHFE-LME arbitrage may be relatively The opportunities for SHFE-LME arbitrage may be relatively The opportunities for SHFE-LME arbitrage may be relatively media hype over policy expectations, environmental protection and the maintenance at smelters, so there will be more chance of the domestic market price being inconsistent with the foreign market price in the short term, resulting in more opportunities for SHFE-LME arbitrage.