Zhang Shunqing: Zinc prices will still see positive trend in 2015 with the potential to break last year’s record
----Interview with Zhang Shunqing, senior researcher of Dayou Futures Co., Ltd.
Dayou Futures Co., Ltd is a wholly-owned subsidiary of Xiandai Investment Co. Ltd which provides professional futures services. Approved by China Securities Regulatory Commission and registered in the Provincial Administration for Industry and Commerce of Hunan, the company has registered capital of RMB150 million (USD24 million).
Asian Metal: The metal market has shown a positive trend with prices moving up slightly after the Chinese Tomb-Sweeping Day. What do you think about the current zinc ingot price increase?
Zhang: Among all the base metals, the zinc ingot market has had a very eye-catching performance these past few days, the reasons for which should be divided into two categories. In terms of the macroeconomic environment, the primary effects of a strong US economy and looser Euro have started to be sensed, and China has issued a series of stimulus policies to stabilize its economy and prevent any overly rapid declines, which has greatly boosted the base metal markets. Meanwhile, with regard to the zinc fundamentals, zinc ore supply is expected to shrink in H2 with an obvious decline for the dominant market stock. And in the futures market, zinc prices have started to draw back after the uptrend throughout H2 of last year, and have almost returned to the lowest level of last year, so the adjustment has been quite thorough. Thus, many buyers have re-entered the market and accelerated the pace at which prices increase.
Asian Metal: The US dollar index has been trending upward since last year and nonferrous metals have borne a great deal of pressure as a result. However, it might start to weaken in the next few weeks after the US government publishes its latest series of economic figures. What’s your prediction regarding the future dollar trend? How about its influence upon the zinc market?
Zhang: The US economy has started to recover and the dollar has continued to be strong ever since the Federal Reserve gave up its easing policy. And with the time for an interest rates rise also approaching, this helped accelerate the dollar index, which went beyond the 100 mark. But for the United States, the overly strong dollar will not actually benefit its own economic growth. And what now mainly concerns the market is: when will the Federal Reserve increase interest rates — in June, September or sometime later? The series of economic figures due in the near future will all have some effect upon the final decision of the Federal Reserve and will be directly indicated by the dollar trend. Until any specific time period has been formally declared, the dollar index will mostly stay in the range of 95-100. And once the period of rising interest rates has started, the dollar will become even stronger. The strong dollar has greatly depressed commodity prices since last year, and the influence has gradually been weakening during the recent period of fluctuation , so the zinc market is slowly going back to its fundamentals.
Asian Metal: The first quarter GDP figures have been published, along with those for industrial added value in March, so what’s your opinion about the future development of domestic manufacturing?
Zhang: China’s GDP in Q1 saw a 7 percent year-on-year increase, lower than the market had expected, and an indicator of the true condition of China’s economic slowdown. The combination of several stimulus policies from the government and the following fine-tuning measures might do little to prevent these poor figures from further depressing the market. But we cannot exclude the possibility of a “bad out” response. In terms of the future development of domestic manufacturing industry, although the pressure from environmental policy and overcapacity elimination still exists, under a relatively loose economic environment, I believe the traditional manufacturing industry should transform and develop steadily.
Asian Metal: China’s economic recovery has been slow ever since the start of this year, and the government is going to great lengths to maintain stable development. Does this mean that China’s economic environment will gradually improve and demand for metals will keep rising?
Zhang: Obviously, the goal of those measures taken by the government is to stop the economy from declining too fast. China has strengthened its support for the real estate industry, together with the replacement of more than one trillion in local government debts, and the pressure from economic slowdown has been greatly eased. In addition, the infrastructure investment, electricity and water conservancy project investments, and the “one belt one road” and “maritime silk road” programs will all inject vitality into the economy of China, and also to that of Asia, Europe and even the world. So I think China’s demand for base metals will still maintain an increasing momentum.
Asian Metal: China has gone to great effort to reform the nonferrous industry in terms of the environment, especially in Hebei, Hunan and Guangxi. Most recently, some galvanizing plants in Tianjin were forced to suspend production. Do you think the storm of environmental protection can keep blowing? If more small and medium-sized galvanizing plants stop production in the near future, will zinc prices ultimately be influenced?
Zhang: This year, the environmental protection law has been enforced to the fullest extent, and the metal industry has had to make choices. Judging from the recent situation, aside from the elimination of some of the obsolete and small-scale capacity, most zinc plants will have to be upgraded through technical reconstruction in order to meet the environmental requirements. The NPC and CPPCC have both listed pollution controls as an important mission for this year and will hand out rigorous punishments for those who violate the law, so we can have faith in its thorough implementation. If some of the medium-and-small-sized plants can be suspended, large-and-medium-sized plants will take a greater share of the market, which is very good for the integration and transformation of this industry, and the imbalance between supply and demand will be reduced. And with regard to the demand side, I don’t think any large reduction will be seen this year, so its influence over zinc ingot prices will be limited, and the recent price rise has been a clear expression of this.
Asian Metal: Chinese refined zinc output has kept increasing, but the steel industry isn’t in very good condition at present. So is there any possibility that zinc prices will be dragged back down due to sluggish demand?
Zhang: The major reasons for the weakness of the steel market are overcapacity and the slump in real estate investment. But galvanized sheet is mainly used in the car industry and in the construction of plants and factories, and the domestic automative industry has maintained a stable growth rate. On the other hand, rising refined zinc output is not only the result of higher TC/RC processing costs, but also an indication of increasing domestic demand. What’s more, the exportation of zinc has also witnessed a marked increase, so the total social stocks have seen a continuous decline. The LME figure for the dominant global stocks has fallen from 1.23 million tonnes in late 2012 to 510,000 tonnes now. Given the bigger picture of a gradual shrinkage in the global supply, there is little space for zinc prices to go down. And as far as I know, quite a few traders have already started to build stocks in anticipation of a price increase.
Asian Metal: China imported 569,000 tonnes of refined zinc in 2014, lower than the total in 2013. So what’s your prediction for the importation figure this year?
Zhang: Judging from the import figures in the past three years – we imported 513,000t of refined zinc in 2012, 624,000t in 2013 and 569,000t in 2014 — I think the imports this year will remain at a relatively stable level of around 550,000t. And the reason lies in the imports of zinc ore. According to statistics, imports of zinc ore soared in some ports this year. For example, Lianyungang imported more than 450,000t of the material in Q1, a significant increase of 173 percent compared with last year, and not far away from the whole-year imports volume of 673,000t in 2014. You can see that the continual increase in refined zinc output is an echo of the drastic increase in zinc ore imports. So, through a reduction in imports and an increase in production, China has managed to balance its domestic supply, or in other words, supplemented the lack of stocks, and substantially increased its exports since 2014, and I expect the trend to continue this year.
Asian Metal: As China’s economic growth slows, the fundamentals of the zinc market have seen no obvious improvement as yet, so is it possible zinc prices will go up this year?
Zhang: As the economic growth has slowed, the government has taken a series of measures to bolster it, which often don’t take effect until 2-3 months later. Looking at the government report this year, the determination to stabilize the economy has been clearly demonstrated, so we still retain a comparatively positive attitude towards the overall economic conditions in the future. Right now, the zinc ingot market is in the later stages of de-stocking, thus the future concern will be focused on whether the supply from zinc miners, who are at the very front of the industry chain, will be reduced or not. And judging from the capital behavior of the market and the zinc price trend: net long positions of LME funds have been on the increase with a relatively stable volume of 50,000 hands, and zinc prices have broken away from the bottom and started to experience accelerated growth. Taking all these conditions in terms of macroeconomic fundamentals and the technical aspects into consideration, it’s reasonable for us to expect further strengthening of zinc prices this year and the record high of 2014 might not be the ultimate goal of 2015.
