Asian Metal: We very much appreciate your granting our interview. What do you think are the reasons for the surge in zinc prices both in China and abroad during June and July, with zinc ingot prices across China up by about RMB1,000/t?

Liu: I think the price upticks are mainly caused by limited supply. With zinc prices consolidating at low levels over the past three years, many small smelters are on the verge of being shut down and larger ones are hesitant about selling, and the tightening supply is pushing prices up. However, zinc stocks across China and abroad have been in a downtrend so far this year, resulting in short supply, so this is the periodical uptrend for zinc prices.

Asian Metal: Would you mind explaining your company’s operational mode when it comes to zinc ingots?

Liu: We mostly sell zinc ingots to end users with a very limited amount of material traded on the futures market. Generally speaking, hedging is all about achieving trade volumes as some companies assess their staff based on their sales volume.

Asian Metal: What about the recent supply of zinc ingots on the Shanghai spot market?

Liu: There is extremely limited availability of Chinese domestic zinc on the spot market at present with very little material from Yuguang-brand, not to mention brands like Feilong, Jiulong and Qinxin. If a particular trader wants to purchase 1,000t of the material for prompt delivery from us, we daren’t accept for fear of failing to supply it.

By contrast, the supply of imported zinc is very abundant. There is lots of imported zinc in bonded warehouses and as the zinc price ratio between the SHFE and the LME has been low recently, importers have suffered great losses. Faced with this situation, they had to keep the material in bonded warehouses and wait for the ratio to turn around before selling again. The inspection at Qingdao Port at the beginning of June resulted in grave concern among importers about the financing prospects of the imported metal market. Therefore, even if the ratio remains low and importers continue to experience significant losses, they still have to clear out their stocks. But as they imported too much previously, stock levels are still high in bonded warehouses at present.

Asian Metal: What about the zinc import market this year?

Liu: Chinese zinc enterprises importing the material are mainly concerned with financing. In fact, a loss of RMB300-500/t is not a problem for them, but their costs are too high at present as the real losses have reached more than RMB1000/t. Zinc import figures were weak between Jan and Mar, but then became stronger up until late-May. The imported zinc available on the market now is from the bonded warehouses built up previously rather than purchased recently. Enterprises have pledged the material to banks to obtain financing.

We also have import qualifications, but we will not do it without profits. The imported zinc market is currently seeing great losses, so we have suspended importing ourselves, only making the odd agent import for other companies occasionally.

Asian Metal: Zinc prices increased significantly recently, but why does China’s home-grown zinc supply remain limited?

Liu: Supply increased slightly at one point in April when prices had just begun to rise and as a result, smelters saw declining stocks. However, with prices continuing to climb, smelters became less interested in selling. In fact, prices were not very high in mid-June but increased significantly up until early July. Besides, smelters had recently reduced production to carry out maintenance, resulting in smaller outputs, so supply is a little limited now.

Asian Metal: Which do downstream clients prefer, domestic Chinese or imported zinc?

Liu: It depends on their purposes. In general, enterprises with high quality requirements purchase zinc of Chinese origin, which is considered better than imported zinc. However, I will not only purchase the domestic material if I am a processor, as the quality of imported zinc is not always lower than its Chinese home-grown equivalent. Some plants only have faith in certain brands, such as Shuangyan and YG. However, zinc ingots from Australia, Belgium and Spain are of higher quality than these two brands, and clients are just reluctant to try them.

Asian Metal: Domestic zinc ingot inventories have continued to show a downward trend this year. Does this signal an improvement in end consumption?

Liu: Although the economy and market sentiment are depressed this year, our downstream clients have not reduced their orders, with some even increasing them. We have kept close tabs on downstream enterprises and found steady end consumption.

Asian Metal: Which are the downstream industries currently showing decent zinc consumption? Do enterprises have sufficient capital? Can they make payments on time?

Liu: We cooperate with many kinds of downstream plants including zinc oxide, zinc alloy and galvanizing producers. Of these, zinc alloy plants have the largest consumption and galvanizing producers have the lowest. Few enterprises reported low consumption, and downstream consumption from all sectors is stable in general.

Currently, payment from downstream enterprises is coming in on time and sentiment in the trade is positive. We apply risk management ratings to downstream enterprises and agree more deals with those that have higher ratings while concluding deals with advance payment with those that have lower ratings; we refuse to deal with enterprises that have low ratings. We usually deliver products to plants and instruct drivers to unload once payment is received. Competition would be very fierce if we were always to ask for advance payment as this is just competing with other firms on price. Once they know that deals can be concluded, clients will choose to make deals with other suppliers who offer discounts if we’re not prepared to do that.

Asian Metal: Chinese environmental protection checks have been very strict in the past two years. What have you picked up from downstream markets?

Liu: In fact, the pollution episodes are still relatively serious in Jiangsu, Zhejiang and Shanghai, although the environmental protection policies in these regions are not as strict as those in North China. Although the electroplating industry belongs to the group of outlawed industries, many plants are still in production, which will generate serious pollution problems during the pickling process. In addition, many MAZAK enterprises still use coke for their energy supply due to the high costs of electric power, which will create widespread smoke pollution.

Asian Metal: Finally, please could you summarize for us the zinc ingot trading environment for this year.

Liu: The zinc ingot market has seen stable deals with a high degree of safety in trading this year after Foshan Yiersan Metal Materials Company’s capital chain rupture incident. We prefer the market atmosphere of last year. There were lots of opportunities to get arbitrages as one sheet of warehouse receipts could be on the move between more than ten traders, but flow volumes between traders have decreased significantly this year as everyone is very cautious with a serious crisis of trust between enterprises.

Many enterprises, such as Meiko, Wanxiang Group and Tokke were involved in the Qingdao Port events, the exceptions being Minmetals, Jiangxi Copper Industry and Founder Group. Once involved in the events, these companies will experience a credit crisis between themselves and the banks. Foreign banks, including Standard Chartered Bank, are very strict in accepting pledges and offering loans to these major trading enterprises and their state-owned equivalents in China.

Asian Metal: Thank you very much for accepting our interview.