Fang Senyu: Cautiously optimistic about zinc prices in Q4, prices in strong position in medium and long-term

Asian Metal: The US economic data have continued to recover recently, but European economic data remain weak. What impact will this have on Chinese prices trends for zinc ingots?

Fang: In international terms, I pay close attention to European and US economic growth, inflation and unemployment data, which can all be measured through the US index. The index is a relative and comprehensive indicator, which encompasses the economic performance of the main economic entities. At the same time, it is a fixed price index for bulk commodities, especially base metals. Therefore, the US dollar index has a significant influence on zinc price trends. And most certainly, the US index is also aggregative,, being a two-way indicator of zinc price trends.

When it comes to China, I think fixed-asset investments and industrial added value have had a greater effect on the recent zinc price trend. The former reflects the predominant direction of national policy, and we can combine PMI and GDP to learn about downstream demand over time. The latter reflects the survival rate of large and medium enterprises, and by combining domestic interest rates and energy conservation and environment protection policies we can clearly assess the latest industrial trends.

Asian Metal: The People's Bank of China (PBOC) has injected RMB500 billion (USD 81 billion) into the nation's five largest banks. What kind of influence has this had on base metal markets? What are your thoughts on this?

Fang: The people’s Bank of China (PBOC) has pushed out RMB500 billion (USD 81 billion) of SLF, which is more of a short-term interest rate instrument and has little influence on long-term trends for zinc ingot prices. Looking back at the first half of the year, economic growth appeared in danger of declining, and the PBOC issued a series of micro stimulus policies to maintain upward momentum. But as time went on, any marginal gains progressively decreased and economic growth once again came under pressure. The economic data were unfavorable during August, so PBOC introduced SLF, which was actually just a continuation of the micro stimulus policy used in the first half of the year. Therefore, I consider this a short-term act to relieve currency flow which had little influence on the zinc price trend.

Asian Metal: Zinc smelters are currently selling zinc ingots steadily, but traders have revealed that supply is limited on the Shanghai spot market. We believe some large-scale traders or organizations may build up stocks, what are your thoughts on this? In addition, once they bear raid, do you think zinc prices will decrease sharply?

Fang: From the point of view of downstream demand and zinc smelters‘ operating rates, many zinc smelters sold materials via traders, so it is possible that some traders built up large stocks.

This had both advantages and disadvantages for the zinc price trend. In terms of consumption structure, it could push up zinc prices. If traders bear raid zinc stocks later on, zinc prices will decrease. However, I think it is unnecessary to worry about bear raids on zinc stocks as, although financing rates remain at high levels, the worst is over. As long as traders’ capital chains don’t rupture, they will not bear raid.

Asian Metal: Zinc ingot prices have been falling recently and even dropped below RMB16,000/t (USD2,606/t) early last week. What do you think about zinc price trends in the short term?

Fang: I think SHG zinc ingot prices will remain stable at RMB16,000/t (USD2,606/t) in the short term, and there will be limited room for zinc prices to fall. The production costs of zinc smelters are around RMB16,000/t (USD2,606/t), so it is hard for zinc ingot prices to go down further. When three month contract zinc prices on the SHFE market were below RMB15,500/t (USD2,524/t), the market trading was very sluggish. However, the transaction volumes increased sharply when the three month contact prices rose to more than 16,000/t (USD2,606/t). We can see this as a sign of industry hedge funds beginning to invest in the market. As a result, I think prices for SHG zinc ingots will hover between RMB16,000-18,000/t (USD2,606-2,932/t), and it is hard to see zinc prices declining any further.

Asian Metal: Generally speaking, H2, especially Q4, is a busy period for consumption and all enterprises will enter their peak period for production. However, demand for zinc ingots is far from improving. Given this situation, what do you think about the relationship between zinc supply and demand in China in Q4?

Fang: We are taking a cautiously optimistic attitude towards zinc demand for Q4. It is a busy period for downstream consumption industries during the fourth quarter, but the boom period for zinc smelters has been brought forward to July-August. Conditions for galvanizing enterprises aren’t good currently, and processing charges remain at a low ebb; nevertheless, both production and exports of galvanized sheet in August increased sharply. Overall, things are optimistic. Given both these factors, zinc smelters are active in selling the metals at low prices to ensure sufficient sales, and this pattern will not change in Q4. With the conditions for upstream refined zinc supply remaining steady, downstream zinc consumers will retain a cautious optimism in Q4.

Asian Metal: A number of zinc mines across the world will be closed in 2015, and participants are optimistic about the long-term zinc price trend. What do you think about zinc price trends in the medium and long term?

Fang: Globally speaking, three zinc mines with a total of 650,000tpy will be closed in 2015, and these are located in Canada and Kazakhstan. Meanwhile, production at zinc mines in the US and India is gradually decreasing. As a result, the supply of zinc ore and zinc concentrate in the market will drop. In addition, zinc smelters’ production costs will increase. Therefore, we’re optimistic about zinc prices in the next 1-2 years.