Asian Metal: The US economy has continued to recover recently, but the European economic data remain weak. What impact will these factors have on the Chinese metal market?

Xiao: In the past ten years, Chinese non-ferrous metal consumption led to an incremental rise in global demand, with the country’s production and sales volume for many base metals accounting for more or less half the worldwide total. Metal price movements, especially the bull market trend, were driven by the “China factor”, with the exception of the period spanning the financial crises in the second half of 2008 and first half of 2009. Zinc metal was on the leading edge of the bull market. Stimulated by mining production during the period, the capacity expansion and operating rates of lead-zinc concentrates and lead-zinc smelters were in the vanguard for non-ferrous metal plates. Therefore, on the pretext of meeting China's growing demand, the lead and zinc market began to see an oversupply. According to the International Lead and Zinc group, the global refined zinc supply entered an excess phase in 2007, which continued through into 2012. Nearly two years on, although the demand balance has once more turned towards a shortage of refined zinc, with the exception of the United States, the growth in other economies is increasingly at risk. China has been facing negative PPI growth for more than 30 months, emanating from declining GDP growth pressure. Because China and Europe are the largest and second largest global consumers of non-ferrous metals, even though demand has exceeded supply, the demand side remained weak given the soft macro-environment, which suppressed metal consumption and curbed prices.

Asian Metal: This year, Chinese zinc concentrate production has increased and the operating rate of zinc smelters has continued to climb. However, demand has been slow to recover. How do you see the current relationship between domestic zinc supply and demand?

Xiao: Judging from the data, the output of Chinese refined zinc was 4,603,000t in the first ten months of the year, down by 0.78% year-on-year. Over the same period, the output of Chinese zinc concentrate was 4,710,000t, up by 4.35% year-on-year.

Production of zinc concentrate decreased, impacted by the sharp expansion in output over the past few years with zinc prices remaining at a low ebb. However, China’s self-sufficiency in zinc concentrate resulted in an abundant supply, with rates reaching around 98%. The supply rate hit 100% in 2012 and 2013. The focus of demand and supply was not on upstream industries and smelting but rather declining stocks and traders being actively engaged in building up stocks. Supported by the increase in zinc prices and depleted stocks, traders were eager to build their inventories during 2014 and zinc premiums on the Shanghai spot market remained at high levels, pushing zinc trading up.

Asian Metal: Zinc prices on the LME and SHFE have remained at high levels over the past few days. Given the current economic situation, what are your thoughts about zinc price trends in the short term?

Xiao: As we entered December, the zinc market was showing a ‘strong outside weak’ pattern. Although crude oil prices had moved down sharply, while LME copper decreased to its lowest level of the year, the zinc price declines were limited. In addition, modal zinc prices on the SHFE were stronger than those on the LME. I think zinc prices will fluctuate narrowly in the short term and prices for SHG zinc ingots will remain at RMB16,000-17,000/t, on a par with Q3.

Asian Metal: The upstream and downstream zinc industries are both facing financial pressure, which may block commodity circulation on the spot market at times. What do you think about this?

Xiao: Given the combined impact on the Chinese economy of the three previous quarters, demand is weak. In addition, high financing costs are the main reason spot enterprises are experiencing pressure on funds. From the perspective of non-ferrous trading, even though the ‘Qingdao port’ event took place, which influenced bauxite, aluminum and copper deals on the spot market, there was a limited impact on trade flow on the spot market. Competition was evident on the zinc market and the pricing mechanism was transparent. In addition, zinc offers were made public and the logistics ran smoothly, while supply remained abundant. If the market appeared to obstruct spot circulation, it may be that some organizations built up inventories for formal business purposes. Therefore, the practice was not widespread.

Asian Metal: The stocks held by many zinc smelters remain at low levels currently, but the majority of zinc smelters are pessimistic about zinc price trends. What are your thoughts on this phenomenon?

Xiao: Zinc prices increased to RMB16,000/t in the second half of the year, supported by the shortage of supply, declining stocks and closures at some of the larger-sized mines. However, from the point of view of zinc smelters, suppliers are mainly selling refined zinc and gaining profits through hedging. They remain cautiously optimistic about zinc prices as demand comes under pressure as a result of the Chinese economic adjustment. Meanwhile, zinc supply across the world is abundant and there will be some new mines coming on stream in 2015. As a result, many zinc smelters hold a cautiously optimistic view about zinc price trends.

Asian Metal: The new environmental inspection law will become public in the New Year. What influence do you think this will have on zinc smelters? Will zinc prices be boosted?

Xiao: The zinc industry may be affected by the lead industry. As regards smelting, zinc smelting is relatively clean. If lead supply decreases under the impact of the new environmental inspection law, zinc prices may be forced to move up along with the increased lead prices. Before, when lead was unlisted, the Shaanxi Fengxiang blood lead incident in 2009 pushed zinc prices up. Viewed selectively, we should be concerned about recontamination from stacks of lead-zinc tailings. Zhongjin Lingnan Fankou’s lead-zinc mine witnessed such an event in 2010, and Zhongjin Lingnan Shaoguan’s zinc smelter was forced to halt production. In recent years, the entry standards within the non-ferrous metal industry have been upgraded significantly and the concentration ratio of lead and zinc industries has improved. Therefore, zinc prices may suffer only a limited impact as a result of environmental inspections.

Asian Metal: What are your thoughts about the price trend in 2015?

Xiao: The market will mainly be focused on the substantial supply shortage following the closure of some of the larger-sized zinc mines globally. Australia Century Zinc Mine, with a production capacity of 510,000tpy will close in 2015. Meanwhile, Ireland’s Lisheen Lead and Zinc Mine will also close during the year. According to data compiled by ILZSG, there will be around 1 million tonnes of zinc ore entering the market in the coming 3-4 years, which will replenish the shortfall arising from mine closures. Zinc prices have remained at a low level for some time. Although the resource reserves of lead and zinc are abundant in the global market, there has been a shortage of exploration and operations at the larger mining projects. Therefore, zinc concentrate supply is facing some short-term risks. However, my objective assessment is that supply volumes for zinc concentrate may be abundant in 2015. From the point of view of demand, ILZSG’s forecast is for things to remain stable currently. The growth in global refined zinc demand reached 5.1% in 2014, and is predicted to be 2.5% in 2015. ILZSG thinks zinc concentrate supply from China will rebound to 6.9% in 2015, based on almost negative growth in 2014, pushing the supply of zinc concentrate globally up to 3.6%. In addition, LME zinc prices on the spot market in 2014 were higher than the 2013 figure of around 10%, and the prices will continue to increase by 3-5% in 2015. More specifically, the zinc resource supply is abundant, so it depends on zinc prices. In general, there is a possibility we will see a zinc price shock upstream.