Gong Maojin: Zinc demand improvement dependent on steel industry situation

----Interview with Gong Maojin, General Manager of China Shellyea Metal Co., Ltd.

China Shellyea Metal Co., Ltd was set up in 2012 with an investment of RMB250 million., Covering an area of 36000 square meters, a combination of scientific research, production and sales are integrated within the high-tech enterprise. The company mainly researches,

Asian Metal: Hello, Mr. Gong, thank you for taking the time to participate in this interview. Firstly, could you please give us a brief induction to Shellyea Metal?

Gong: We set up a company trading in nonferrous metal in the early days, and established China Shellyea Metal Co., Ltd in 2012 in order to adapt to market demand. At present, the company mainly produces zinc alloy, including three sections: multiple hot-galvanized alloy, batch galvanizing alloy and steel pipe zinc alloy. At the same time, we also produce die-casting zinc alloy.

Although my company isn’t the largest enterprise in the industry, our product variety is the most comprehensive at present.

Asian Metal: With regard to your zinc hot galvanizing alloy business, can you please carefully summarize the company’s operating conditions?

Gong: With the state of both the economy and macro situation this year, compared with last year, our company’s market share and turnover have taken a step forward. In addition, customers are more receptive to our brand—Golden Rhino. Although development of the enterprise has been slower than we expected, given that this year the economic situation has been exceedingly serious, with developments across the whole industry unfavorable, our company is still at the forefront.

Asian Metal：As we entered September, prices for zinc ingots continued to decline. Although the prices rebounded early on, it was a flash in the pan. The continuous decline of zinc prices has led to a lack of confidence; what’s your opinion on that?

Gong: There was limited influence on the narrow fluctuation of zinc ingots, and we did not pay close attention to the fluctuation in zinc prices. Because the industry chain for zinc alloy is short, and the production period is around three to five days, it takes around ten days from raw material procurement to product sales. Therefore, we keep a watchful eye on production and trading. However, if zinc prices fluctuate sharply within the short term, our production will be affected. For instance, zinc prices suddenly saw a sharp increase in early October, and we were mistaken in our judgement of the price trend, leading to higher purchase costs. Overall, upstream, downstream and our processing links maintain close communication, and this plays a key role in zinc prices.

Asian Metal:What are the effects when zinc prices continue to move down?

Gong: If zinc prices continue to edge down, we will find it hard to purchase zinc ingots. The prices for zinc ingots dropped below RMB14,000/t in the second half of September, and many suppliers held back from selling. Although we took some measures to solve the problem, suppliers saw no profits or suffered losses. Therefore, it was hard for us to purchase zinc ingots in large quantities. Meanwhile, our production plan was affected.

Asian Metal:What measures have your consumers adopted with zinc prices falling continuously?

Gong: In fact, downstream customers usually build stocks to some degree, but play it reasonably safe on inventories. They don’t build up a large amount of stocks, regardless of any sharp increase or decrease in zinc prices. Cash flow across the whole industry is limited currently, and consumers will not purchase many raw materials due to it being too risky. In addition, once consumers purchase too great a quantity of zinc ingots or zinc alloy, they won’t have sufficient funds to purchase other raw materials. Our partners are direct users, who purchase from hand to mouth.

Asian Metal:Right now, zinc prices have decreased to their lowest level this year, and excess supply has met with weak demand. In addition, prices for steel have edged down continuously with many steel plants suffering losses and delayed payments. How is your company dealing with this?

Gong: It can be said, we service the steel industry chain, and if the operating conditions in the steel industry chain are not good, we will be affected. Overall demand for steel is decreasing. The market is sluggish and it is hard for us to grow given this trend. As our industry chain is relatively short, we have three main strategies to cope with the current weak market:

Firstly, quality. The quality of zinc alloy is unevenness, so we must ensure the quality of our Gold rhino brand zinc alloy.

Second, service. Improve our service levels and efficiency and supply closer technical service and security for users.

Finally, innovation. Downstream consumers can adjust the positioning of their products under the ‘new normal’ structural adjustments. Meanwhile, they may have a demand for new raw materials, so we are going to do some special research on alloy product areas to ensure that we can meet downstream consumer demand.

Asian Metal: It is known that some larger zinc smelters also produce zinc hot-galvanizing alloy. Compared with them, what are your company’s advantages?

Gong: Our reactions will be quicker. Large-scale smelters usually sell zinc alloy through traders, and feedback about the nature of customer demand and traders’ insights is relatively slow. In addition, the decision-making process for large smelters is longer, and [??]a series of linkage[??] the reaction period will be longer than ours. Last Friday, I took the 2015 Harvard business summit on the theme of "" new right" VS "old rights”, and one of the discussions was the "new right" and "old rights" or "new trend" and "old trend". I understand the "new trend" to be from demand to production, and this is a new enterprise management strategy. “Old trend” is from products to demand. It is different in both directions. Currently, our industry drives demand after we have products. However, we can translate demand into products quickly through technological innovation.

At the same time, we are always looking to develop a differentiation strategy. We have pretty much perfected our research system. Of course, compared with larger-sized smelters, our comprehensive strength has certain gaps, but our operation is more flexible and practical. In terms of our current operations, our company is running smoothly.

Asian Metal: Does your company have its next development plan?

Gong: Currently survival is difficult for steel enterprises, as a direct result of their production and passive operation. The main reason for the passivity is serious homogeneity. In addition, there is excess capacity, with each enterprise continually decreasing its prices. Now we are relying on our technical advantages and helping customers to do a longitudinal joint, and make up for customer issues as far as possible.

In terms of zinc alloy processing and trading methods, we will resolutely implement the company's three strategies (quality, service, innovation). I have already mentioned these just now and will not repeat them here.

In addition, in order to diversify development, our company—Beijing Shellyea Technology Co., Ltd—will develop into other areas of the relevant industries. We are working on environmental protection, equipment matching, enterprise informatization, intelligent manufacturing and so on.

Asian Metal: Do you think the zinc market will improve this year?

Gong: Good or bad in terms of the zinc market mainly depends on market demand and the macro environment. According to statistics, about 50-60% of zinc is used on steel corrosion related products, so demand for steel is important for the zinc market. At present, many steel plants are loss-making operations; if they suffer losses over a long period, these enterprises must become more integrated. However, I think it is unlikely we will see any integration this year. Because enterprises’ assets are underperforming in the current circumstances, there are no positive external forces to propel them. Therefore, it will be hard for the industry to reshuffle from within. Of course, this is from a pessimistic perspective. From the optimistic point of view, China's macro economic policy is developing according to everyone's expectations. For instance, the People's Bank of China cut interest rates last Friday, and double-down will support the traditional real economy and provide a certain boost for engineering, construction, investment — but it takes time. If the steel industry improves, the zinc market can expect to improve.

Asian Metal: Thanks for sharing your views. I hope the zinc alloy production goes smoothly and wish your company a bright future.

Gong: Thank you!