China’s refractories market: Managed decline

By Albert Li
Published: Monday, 22 August 2016

A policy to reduce steel capacity in China has neutralised the impact that rising steel production might have had on refractories demand in the first half of this year, while the tough trading conditions have prompted some companies to exit the market altogether, Albert Li, IM Analyst, finds.

The refractories industry has been in more or less steady decline for the last five years and 2016 has seen no let-up in the sector’s downward spiral. Refractories consumption is tied to steelmaking activity, but when policy interferes with macroeconomics, this relationship can break down. 

China, the world’s single largest supplier of, and market for, refractories, has illustrated this deterioration on a massive scale, as the government’s commitment to reduce domestic steel capacity has countered any support the recent uptick in steel prices and production might have had on refractories demand.

China’s economy grew steadily in the first six months of this year, expanding at a rate of around 6.7% according to official statistics – within the government’s target range. As well as growing the Chinese economy, the government wants to modernise it, eradicating older, highly polluting factories in favour of more efficient operations, leading to more profitable industrial output.

The main drivers of steel demand in China are real estate and infrastructure. Chinese fixed asset investment during the first half of this year increased by 9% year-on-year (y-o-y), including 21% growth in infrastructure spending. Automotive sales, another major force for steel consumption, rose by 8% in the same period.

Chinese crude steel production in January-June totalled 399.56m tonnes, according to World Steel Association (worldsteel) figures, down 1.1% y-o-y. This represents a significant narrowing of the y-o-y gap in steel output since January, when Chinese monthly production was 7.8% behind the same month in 2015. Many industry observers believe that China has produced more crude steel this year than worldsteel data suggests, based on suspicions that the government massaged the figures down in order to appear to have complied with demands from the international community to cut capacity and reduce the flow of cheap steel onto an oversupplied world market.

The H1 2016 performance of China’s top refractories companies had not been announced at the time of writing, but there are signs that some manufacturers saw a recovery in the six months to the end of June. More noticeable, however, have been the price wars caused by overcapacity of some refractory materials, cash flow problems and difficulties in securing finance from banks. 

The payments situation has become so acute that the China Refractory Association recently advised its members to only accept cash from buyers.

As with steel, increasing volumes of refractory materials have been finding their way onto international markets in the last five years, driving prices down. Apart from the general problem of oversupply in China, one of the main reasons for this trend is that international trade terms mean Chinese refractory producers receive prompter payments from export customers than they do from domestic buyers. 

However, in the first half of 2016, export volumes of all major refractory materials with the exception of alumina have fallen y-o-y, suggesting that even international demand for cheap Chinese refractories is ebbing.

Chinese first half refractory materials exports/imports %
change y-o-y

Refractory material

Quantity

Average price

Fused magnesia (FM)

↑ 10%

↓ 10.39%

Dead burned magnesia (DBM)

↑ 2%

↓ 12.09%

Caustic calcined magnesia (CCM) 

↓ 9.4%

↓ 7.61%

Silicon carbide

↓ 5.2%

↓ 5.45%

Alumina 

↓ 30.1%

↑ 11.57%

Alumina (imports)

↓ 7.4%

↓ 30%

Bauxite (imports)*

↑ 13%

↓ 9.65%

Flake graphite

↓ 1.3%

↓ 5.43%

*Mainly metallurgical-grade bauxite from Australia, Malaysia
and Guinea but includes refractory-grade material from Guyana.
Source: China Customs 

Innovating out of depression

Dashiqiao, known as the Capital of Magnesium, in Liaoning province, northeast China, is home to around 800 magnesium-related companies and has a total magnesium production capacity of more than 10m tpa and with sales of approximately Rmb 850m ($128.1m). Around 60% of Dashiqiao magnesium is exported and 40% is sold domestically. 

The area around Dashiqiao city has a long history of magnesite mining (See pp48-55). Like other resource-reliant cities in China, Dashiqiao is facing the need to transition its traditional raw materials industry to a modern one. Demand for magnesium and magnesia in China is slowing, prices are low and there is fierce competition among suppliers. 

Dianhui Xu, secretary of the Dashiqiao Municipal Party Committee, says that the city needs to invest in new technologies and in developing new products in order to weather the tough market conditions.

During China’s 12th Five Year Plan, which ran from 2011 to 2015, Dashiqiao embarked on an ambitious transition plan, with 1,000 companies pledging to invest in innovation and plant upgrades. The city’s local government signed cooperation agreements with more than 13 universities and research institutions, including the Qinghai Salt Lake Research Institute of Chinese Academy of Sciences. 

To date, several Dashiqiao magnesium companies have emerged as leading enterprises in their field, establishing a number of brands, patents and six product quality benchmarks which have since been confirmed as national standards for materials including agricultural magnesium sulphate and magnesia-carbon brick.

According Dianhui, producers of traditional magnesia refractories have successfully developed new technologies, including a process for using low grade magnesite to produce fused magnesia (FM). The technique, engineered by Dongji Group, claims to reduce unit consumption of energy in standard furnaces from 2,900 kWh/tonne to 2,500 kWh/tonne. Other Dashiqiao-based refractories companies, including Fenghua Industrial Group, Xinwei Refractory Co. and Yingkou Jinlong Refractories Group, have also launched new techniques for making magnesia refractories which they say use up to 35% less energy and emit less pollution.

Albert1 

Production of fused magnesia in Dashiqiao, Liaoning.

Moving away from refractories

Some companies in Dashiqiao have taken the view that magnesite can be turned to more profitable uses than refractories and have switched their focus accordingly. Yatai New Building Material Technology Co. used to produce magnesia refractories but three years ago it switched to making magnesium-based building materials instead. 

The niche in the market Yatai has sought to fill is an alternative to traditional outer wall insulation materials, which are highly polluting to produce and which generally perform inefficiently. It invested Rmb 380m ($57.23 m) in reorganising its manufacturing operations and in developing magnesium-based building materials that do away with the need for external thermal insulation.

As well as opening up new sales opportunities for Yatai, which holds 36 patents for its magnesium construction products, this switch also saved the company 70,000 tpa of thermal coal to power its factory and 178,000 tpa of subsequent carbon dioxide and 590 tpa of sulphur dioxide emissions, as well as 1.6m tpa of solid waste, including low-grade magnesia, for disposal.

Dashiqiao has also become a hub for magnesium chemicals production, as former refractory producers diversify into this area. The city has 11 magnesium fertiliser producers, each with a capacity above 500,000 tpa, led by Yingkou Magnesite Chemical Industrial Group, the biggest single producer of sulphate magnesium fertiliser in the world. 

Other companies are branching into magnesium alloy production and the Dashiqiao government has expressed its intention to support manufacturers to begin producing magnesium alloy plates for use in aviation, military applications and automotive.

Environmental protection

Like other industrial cities in China, Dashiqiao has pledged to cut its pollution and improve its efficiency. 

Since announcing its environmental policy towards the end of the last Five Year Plan, the city has dismantled 83 kilns for producing caustic calcined magnesia (CCM), 19 FM kilns and 29 DBM kilns, according to official statements.

Companies like Yatai have adopted natural gas as their main energy source in place of coal, while Anshan Aohai Refractory Co. has invested Rmb 30m ($4.52m) in dismantling its old electric melting furnace and dust collector and building 32 state-of-the-art FM furnaces.

But while the global refractories industry remains under pressure and magnesia prices continue to decline, persuading Chinese companies to invest in cleaner technologies and diversified product portfolios is challenging.

Western refractories companies continue to complain that the higher environmental and labour standards they adhere to sets them at a disadvantage against low cost Chinese competitors. While there are some signs that China is moving towards parity with their Western peers, it is clear that there is still a long way to go.

*Conversions made August 2016