Corruption hinders Liaoning magnesia

By Albert Li
Published: Friday, 04 November 2016

Liaoning province is regarded as the capital of Chinese magnesia, but rising production costs and slowing demand for refractories are causing the industry to struggle.

Liaoning province on the border with North Korea in north-eastern China has some of the richest magnesite resources in the world, with reserves estimated at 3.25bn tonnes and production capacity of around 10m tpa. The main deposits are located around the Haicheng and Dashiqiao area of Anshan and Yingkou city.

Haicheng produces raw magnesite while Dashiqiao has a number of facilities for processing refractory magnesia products.

These two regions are home to nearly 100 magnesite mining companies and 500 businesses involved in the magnesium supply chain. Collectively, they produce 5m tpa caustic calcined magnesia (CCM), 3m tpa deadburned magnesia (DBM) and 2m tpa fused magnesia (FM).

However none of these companies rank in the top 10 global magnesia producers, since the Haicheng and Dashiqiao magnesium industries are made up of small and medium-sized businesses, engaged in fierce competition and price wars.

According to Guodong Zhang, director of the Liaoning Nonmetallic Mineral Industry Association, despite weak demand for refractory magnesia in China, many of the larger corporations are still managing to accrue significant profits.

Smaller companies are being targeted for consolidation by the association, which is pursuing government-backed policies to upgrade Liaoning’s magnesia supply chain and protect the local magnesite resources for the largest companies with the most sophisticated mining and processing equipment.

Efforts to reform Liaoning’s magnesia industry have been hindered by a dysfunctional local political system, which is mired in corruption allegations. In September this year, state investigators exposed an electoral bribery scandal – the first case of its kind since the Chinese republic was founded in 1949.

This political dysfunctionality has bled into Liaoning’s economy. In the first half of 2016, Liaoning was the only province in China to register a contraction in its economy, while the average GDP growth in the rest of China was 6.7%, according to official statistics. The province’s debt-to-GDP ratio by the end of 2015 stood at 158%, one of the highest in the country.

Census data shows that the population of Liaoning fell by 90,000 in 2015, the first decline in 17 years, as economic migrants left the province to work elsewhere in China.

The political and economic situation in Liaoning has deterred private investment in the province and this has been felt acutely in the magnesia industries of Haicheng and Dashiqiao. Whole swathes of Yingkou city, which incorporates the district of Dashiqiao, lie deserted. This includes recently constructed international hotels and the city’s high-tech zone.

Average wages for workers in Liaoning’s magnesite mines and processing plants are around Chinese renminbi (Rmb) 3,500-6,000 ($517-887) per month, but competition from other, less dirty industries makes it difficult for magnesia companies to attract a workforce.

Liaoning’s magnesia industry

Depending on detailed product specifications, size of orders, delivery terms, quantity, export quotas and licences, export prices for Liaoning magnesia can vary by up to $50/t.

Export taxes on CCM currently stand at 5%, whereas DBM and FM are both subject to export duties of 10%.

 Chinese magnesia prices*

Product

Grade

Price/tonne

DBM

90% MgO, FOB China

$210-230

 

92% MgO, FOB China

$240-260

 

94-95% MgO, FOB China

$290-305

 

97.5% MgO, FOB China

$370-400

 

 

 

CCM

90-92% MgO, FOB China

$170-200

 

94% MgO, FOB China

$350-375

 

96% MgO, FOB China

$435-520

 

 

 

FM

96% MgO, FOB China

$420-480

 

97% MgO, Ca: Si 1:1, FOB China

$490-505

 

97% MgO, Ca:Si 2:1, FOB China

$530-545

 

98% MgO, FOB China

$770-950

Source: Industrial Minerals

Dashiqiao-based Hongyu Refractories Co., one of Liaoning’s largest refractory magnesia exporters, expects export prices for magnesia may rise by up to $20/tonne over the next few months owing to a sharp rise in the cost of coal, used to fuel furnaces and kilns at processing plants. Coal prices have been increasing since the middle of this year, when the Chinese government imposed a 276-day working limit on mines in order to reduce oversupply.

New resource taxes have also had an impact on the cost of magnesia production in Liaoning, as well as higher wages and freight charges, owing to new trucking regulations cutting load limits from 50 tonnes to 40 tonnes. The aim of the regulation is to reduce damage to roads and also to encourage more use of rail freight.

Other companies doubt whether magnesia producers will be able to pass on higher input costs to customers. Jinding Magnesia Group, also based in Liaoning, told IM that prices rises may not be accepted by buyers, particularly given the weak state of the refractories business.

Loss-making and highly leveraged steel companies, the biggest consumers of magnesia refractories, have been delaying payments to suppliers. An upturn in the steel market since the second quarter of this year has improved trading conditions, but significant steel mill overcapacity has kept a lid on any significant recovery in refractories. Demand for cement refractories is stronger than steel, but represents a much smaller market.

DBM and FM are used almost exclusively in refractory products. CCM has a wide range of end use markets and benefits from an export tax rate half that of DBM and FM, so industry observers are generally more positive about the CCM market than for other types of magnesia.

Slowing domestic consumption of Chinese magnesia and preferable international payment terms are pushing more material onto export markets. Dashiqiao-headquartered Fenghua Industrial Co., a leading FM producer, told IM that whereas domestic sales used to make up 70-80% of its business, the same proportion is now accounted for by exports.

In line with the Chinese government’s industrial development policy, fewer and fewer companies are exporting raw magnesia with most now shipping higher margin finished and semi-finished refractory products instead. Qinghua Group, the biggest magnesia company in China, which used to export magnesia now consumes all of its raw material internally to produce refractories, most of which is shipped abroad.

Export quotas and licences

In order to protect domestic mineral resources and limit exports of low value raw materials, the Chinese government imposed export quotas and licences on magnesia around two years ago.

Magnesia companies have to bid twice a year in government-run auctions to receive allocations, although to date these export quotas have not been used up, prompting speculation that the system may be cancelled.

Recent World Trade Organization rulings have forced China to cancel export quotas for rare earths, fluorspar and some metals, and some believe that there may be a similar decision on magnesia in the future.

But some Chinese magnesia producers disagree, arguing that the removal of policies aimed at controlling magnesia supply will lead to a race to the bottom as producers flood the market with material. Some companies are also reluctant to give up a lucrative trade in selling on their quota allocations and licences to rival businesses.

According to market sources, the going rate for a tonne of magnesia quota is currently around Rmb 450/tonne ($67/tonne). 


*Editor's note: The values in the table in this article were corrected on 1 December.