Refractory manufacturers’ vertical integration strategies under fire

By Laura Syrett
Published: Friday, 27 June 2014

Mineral investments probed at MagMin 2014; RHI, Magnesita outline benefits of captive mines

Global refractories manufacturers were forced to defend decisions to invest heavily in upstream raw materials capacity at IM’s annual MagMin conference in Budapest in June.

Speaking during a panel discussion about the refractories industry’s reliance on Chinese magnesia, Vasili Nicoletopoulos, director of US headquartered Premier Magnesia LLC, challenged decisions made by companies including RHI AG and Magnesita to mine their own minerals rather than import Chinese raw materials.

Nicolotopoulos said that these costly upstream investments were based on assumptions that Chinese refractory minerals would go up in cost and down in grade.

“In my opinion, Chinese magnesia has not declined in quality and it has not gone up in price - in fact, prices have weakened,” Nicolotopoulos said.

“The real issue is reliability,” he added, pointing out that the refractories industry outside China could not be certain of securing supplies of magnesia from the country indefinitely.

Nicolotopoulos also questioned whether new mines in places like Turkey, where RHI has recently invested in additional dead burned magnesia (DBM) capacity, and Brazil, where Magnesita has a magnesium oxide (MgO) operation in Brumado, are better placed to serve manufacturers than those in China, which benefit from established shipping routes and low cost production processes.

Bernhard Goliasch, head of group raw materials supply for Austria-based RHI AG, responded to Nicolotopoulos that although magnesia prices may currently be in decline, this situation could not be expected to continue.

“Exports might be down at the moment, but when exports [and demand] go back up, so will prices,” he said.

“For vertical integration, we need to have a long brief. In the long run, China will not keep prices down - I am 100% certain,” Goliasch added.

He also warned that the industry needed to be prepared for sudden supply chain disruption in the future. “We all remember 2008 [when prices spiked]. I do not know when it will come again, but I am sure it will.”

He also noted that RHI has been producing raw materials in Turkey for over 50 years, so further capacity expansion in the country was a practical move for the group.

Sourcing quality

In response to the question of whether the industry needs to source better quality magnesia, Jim Piraino, vice president for industrial sales at the Brazilian manufacturer Magnesita, said that his company’s mine in Brumado, Brazil, was justified by its capacity to produce superlative material.

“We believe that our DBM is better than any of the Chinese MgOs (...) and for a large part of the world, it makes sense to bring material from Brazil,” he said.

This point was bolstered by the argument put forward by Fotis Kandianis, managing director of Magnacom SA, who pointed out that there is a shortage of high grade magnesia.

“China’s goal is to achieve high quality steel and the goal in the rest of the world is to achieve very high quality, clean steel; this requires high grade raw materials,” he said.

Kandianis cautioned, however, that even the highest quality magnesia products could not expect to command significantly inflated prices in the current market.

“Raw material demand in China at the moment is moderate. It is weak (...) [Today’s] magnesia demand does not justify higher prices, excepting that production costs are increasing,” he said.

Pedro Munroz Rodriguez, MgO sales manager for the Mexican company, Servicios Administrativos Penoles, noted that the major driving force behind designations of criticality for magnesia was supply concentration in China.

He agreed with Nicoletopoulos that supply security was a major justification for creating new sources of magnesite outside China, highlighting the importance of both Turkey and Brazil as increasingly important producers.

However, as Kandianis pointed out, the industry should not expect supply diversity to be accompanied by cheaper production or shipping costs, warning that these are likely to increase in future.

“There is a big difference in shipping costs between shipping from the Far East to Europe and shipping back the other way,” he said. “This is because the containers are going back empty (É) freight rates are unlikely to go down, it is more probable that they will go up,” he added.