China does away with magnesia quotas

By IM Staff
Published: Friday, 25 November 2016

Export quotas for magnesia have disappeared from the latest government list released for 2017, as the news prompted mixed reactions from the domestic industry. As things stand, export taxes could be scrapped by year-end.

By Albert Li and Rose Pengelly

On 31 October, China’s Ministry of Commerce announced export quotas for industrial and agricultural products for 2017. For the first time since 1994, this list did not include magnesia.

The unceremonious ditching of restrictions on magnesia shipments suggests that China’s policy of controlling raw material exports may at last be loosening. The country’s government had set an apparently arbitrary limit of 1.7m tonnes on magnesia exports for 2016, while exports of talc, which has also been removed from the quota list, were capped at 750,000 tonnes.

The move is probably related to recent World Trade Organization (WTO) rulings that China’s restrictions on fluorspar and rare earths exports contravened international trade rules, following complaints by the US, EU and Japan. Quotas on these minerals were lifted last year.

It may also signal recognition by the Chinese government that the quotas were largely ineffective, given China’s porous land and sea borders, which fostered a rampant smuggling industry, and because quotas were rarely used up through certified exports.

China’s official reason for introducing an export quota system in the 1990s was to protect domestic mineral resources, which the government deemed strategically important, from over-exploitation. Chinese magnesia companies were invited to bid twice a year to purchase a portion of the annual export quota. Allocations were nominally made according to the size, efficiency and performance of the company, although many suspected that licences were awarded because certain companies had close links to government.

Every year, it was rumoured that that the system would be scrapped, mainly because most companies failed to use up the allocations and because of the legal but exploitative secondary trade in quotas to other companies, whereby a tonne of quota could sell for more than a tonne of magnesia. It was possible for a magnesia company to make significant profit from its magnesia quota without even breaking ground on a magnesite mine.

Industry reaction

There has as yet been no official statement on the apparent cancellation of magnesia and talc quotas and it remains unclear what the Chinese government will do next. Some industry observers believe that China will now move to control production – a domestic policy which would be outside the jurisdiction of the WTO – as it did with rare earths.

Even Chinese magnesia companies are unsure how they will be regulated next year. Some fear that the government may force consolidation of the industry into a handful of large companies, which can be more easily monitored by state authorities.

The absence of any formal announcement meant that the news was slow to sink in. 

One large magnesia supplier in Dashiqiao said that he was shocked to hear that the quotas had been cancelled and doubly surprised to learn about it through IM, rather than official channels. He welcomed the abandoning of export controls, however, because he believes his company will now be able to export fused magnesia (FM), for which he previously did not have a direct licence, relying instead on re-sold quota.

Industry sources at IM’s MagMin 2016 conference in Dusseldorf in April said that the fee for magnesia export quota charged by the Chinese government is around Chinese renminbi (Rmb) 330/tonne ($48/tonne*). The recipients of the government quota, which usually purchase between 40,000 and 50,000 tonnes at a time, can then sell this on for around Rmb 450/tonne ($65/tonne), a 35% premium.

In theory, such profiteering is no longer possible, which will please many second tier Chinese magnesia companies.

Others are less positive about the news. Another Dashiqiao magnesia producer told IM that some of his international customers cancelled their orders as soon as they learned that the quota had been lifted, saying that they would wait until 2017 to see if a surge in exports put downward pressure on prices.

The producer said that price falls are likely, since there are a large number of Chinese magnesia companies, but only a small proportion were allowed to export under the quota system. The removal of controls will probably lead to fierce competition, price wars and a flooded market, he said.

It seems that local governments in China were also taken aback by the central State Council’s decision to drop the quota. An official from the Liaoning Provincial Special Resource Protection Office told IM that he expected national and regional authorities would shortly pass new regulations to compensate for the removal of export controls.

As well as production limits, he said that governments could levy higher resource taxes on magnesite production in order to keep a lid on supply. Both of these policies have been implemented in the rare earths sector after the WTO forced China to drop export restrictions on these minerals.

"The problem is, rare earth companies are consolidated while magnesia companies are small, scattered and disordered, which is difficult to regulate as a whole," the official said.

Export taxes

One trade device that may limit China’s international magnesia shipments in the near term is the export tax system.

Export tariffs are currently set at 5% for caustic calcined magnesia (CCM) and 10% for both deadburned magnesia (DBM) and FM.

However, even this mechanism may have to be amended or removed in the future. In July and August this year, the US and EU respectively filed separate cases with the WTO against Chinese export duties on several minerals and metals, including magnesia. 

Although WTO cases typically take several months or even years before a ruling is made, and can then be subject to appeal, the actions could see tariffs on outbound Chinese magnesia shipments cancelled as well.

It is difficult to estimate how this would affect the global magnesia market. Following the cancellation of export quotas and duties on fluorspar and rare earths last year, the price and volume of exported Chinese fluorspar barely changed, whereas rare earths exports surged and prices fell.

According to the China Fluorspar Commission, this difference was due to the relative unity, legality and better organisation of the Chinese fluorspar industry compared to the country’s rare earths sector, which is riven with illegal mining and trading.

China’s magnesia industry is fiercely competitive, but seemingly more law abiding than the rare earths business.

If China decides to preempt WTO rulings, the magnesia market could learn as early as December whether or not Chinese export tariffs are to be amended, since the government announces trade levies for the year ahead at the end of the month. 

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