China’s magnesia market dilemma

By Carrie Shi, William Clarke
Published: Friday, 01 November 2019

Magnesite production restrictions and magnesia factory suspensions in China have failed to raise magnesia prices, trapping the country’s producers in a difficult situation. With prices already at unprofitable levels, stocks mounting and no sign of a demand rebound in downstream markets, Carrie Shi and William Clarke consider how Chinese magnesia companies are responding to the situation.

China’s magnesia market has been stuck in a bind in 2019. 

Low prices have continued to dominate the spot market, even though mining restrictions and a ban on using explosives have remained in place in Haicheng, the part of China's northeastern Liaoning province where, along with Heilongjiang province, the majority of Chinese magnesite is produced. 

The persistent price weakness has been blamed on quiet demand from downstream buyers and increasing stocks held in inventories at customer warehouses, which have deterred magnesia consumers from taking advantage of low prices to stockpile additional material.

Having entered 2019 on a downward trend, the market decline accelerated in the early part of the year, pressured by accumulating producer stocks.

Magnesia consumption in the refractories sector has also dwindled, while supply of magnesia bricks has outweighed demand from the steel, glass and cement sectors and Chinese refractory manufacturers have been subjected to operating restrictions.

Most Chinese magnesia producers responded to the downturn in demand
by lowering prices to boost sales and cash flow. 

By October 2019, this race to the bottom had pulled prices to their lowest level in nearly two years.

It had been expected that curbs on magnesite mining by the Chinese government would curtail raw material supply and push up magnesia prices.

On August 1, authorities in Liaoning and Heilongjiang imposed a three-month halt on magnesite mining, due to last until October 31.

The ban was deliberately intended to encompass a national holiday in China from October 1-7 for the country’s 70th anniversary celebrations and to reduce local pollution levels during the festivities, as well as to give producers and buyers a chance to run down inventories.

Liaoning province was also to impose new regulations, starting on October 1, aimed at improving the efficiency of the province’s mining industry by forcing mine owners to implement new technology and equipment, or face permanent closure.

Similar restrictions and regulations on magnesite mines in the past have pushed up prices, but so far this year the effect has been barely noticeable.

Faced with flat market conditions and having slashed prices to what some market commentators believed were unsustainably low levels, China’s magnesia producers are facing a dilemma over what to do next.

Declining refractories demand

Chinese refractory output has decreased this year compared with 2018, with production hubs such as Henan and Shandong provinces being forced to implement rolling closures to allow for strict environmental inspections - some of which have resulted in longer suspensions, so that remedial action can be taken. 

China’s total output of refractory materials was 8.61 million tonnes in the first half of 2019, down by 9% from 9.45 million tonnes in the same period of 2018, according to data from the China Association of Refractories.

The country produced 3.1 million tonnes of unshaped refractory products in January-June 2019, down by 4.6% compared with the first half of 2018. 

This included 2.7 million tonnes of alumina-silicon refractories and 453,600 tonnes of magnesia-based unshaped refractories, down by 1.9% and 17.6% year on year respectively.

"Downstream buying from the refractory sector has been persistently weak this year, which puts more pressure on refractory raw materials such as magnesia," one Chinese magnesia producer told Fastmarkets.

"I estimate demand from refractories will not improve greatly in the remainder of 2019, with the approach of seasonal factory closures and new restrictions from the authorities. This will further depress demand for raw materials," the producer added.

Limited options 

Market participants both in and outside China are not optimistic of a magnesia market turnaround any time soon.

Suppliers of magnesia products at the Unified International Technical Conference on Refractories (UNITECR) in Yokohama, Japan, in mid-October suggested it may take at least another eight to 10 months for the market to improve.

Some predicted that market conditions would get worse in the first half of 2020, before potentially recovering from an anticipated nadir in the middle of next year.

In compliance with new regulations requiring technical upgrades, some Chinese magnesia producers with sufficiently robust balance sheets are using the suspension period to invest in new processing facilities, especially flotation lines, with large capacities, for high-purity products, Fastmarkets understands.

It is assumed that the production ban coupled with extremely testing market conditions will weed out weak and inefficient suppliers, allowing newly upgraded producers to absorb their market share when the sector rebounds.

Industry sources have estimated there could be some 10-12 flotation lines being installed in China’s main magnesia-producing areas for dead burned (DBM) and fused magnesia (FM) this year.

Some have questioned China’s magnesia production strategy, calling it "confused", and many are waiting anxiously to see how the policy of restricting production while investing in new capacity plays out over the coming months.

Chinese magnesia exports ebb

Compounding weak domestic demand for Chinese magnesia, orders from abroad have also slowed down this year.

The global refractories market has had a sluggish 2019 due to weak end market activity and oversupply of refractory materials. 

Volatility in China’s magnesia market in the past two years caused by production suspensions have led many foreign buyers to choose to buy more magnesia from suppliers outside of China to guarantee consistent supply and predictable pricing, rather than risk another Chinese supply squeeze and corresponding price surge.

FM

China’s exports of fused magnesia (FM) in particular have dropped off significantly compared to last year, and prices have collapsed.

China exported a total of 246,616 tonnes of FM in the first eight months of 2019, down by 31% from 356,957 tonnes in the same months of 2018. 

FM export revenue was $188.13 million in January-August 2019, down by 40% from $313.1 million in the same period of the previous year, customs data shows.

Fastmarkets assessed the price for magnesia, fused, 97% MgO, Ca:Si 2:1, lump, fob China at $750-850 per tonne in the second week of October, down from $1,250-1,350 per tonne in early 2019.

DBM

Exports of Chinese dead burned magnesia (DBM) have grown slightly year-to-date from 2018, although prices have eroded.

China exported a total of 664,077 tonnes of DBM in the first eight months of 2019, up 7.1% from 619,866 tonnes in the same months of 2018. 

DBM export revenue was $198.3 million in January-August, down 20.6% from $249.59 million from the equivalent period last year.

Fastmarkets' spot price for magnesia, dead burned, 97.5% MgO, lump, fob China was $500-600 per tonne in the second week of October, down from $1,100-1,300 per tonne on January 1, 2019.

CCM

China’s caustic calcined magnesia (CCM) market has mostly held steady in 2019 compared with the previous year, with prices rangebound in the first half of the year on stable demand from the chemical sector, which is another major consuming sector of CCM beside refractories.

Export prices started to weaken in July, however, due to globally flat magnesia markets.

China exported 535,963 tonnes of CCM in the first eight months of 2019, up 3.8% from 516,435 tonnes in the same months of 2018. 

Export revenue was $92.4 million in January-August, up 0.8% from $91.7 million in the same months of 2018.

Fastmarkets assessed the magnesia, calcined, 90-92% MgO, fob China price at $170-210 per tonne in the second week of October, down from $180-220 per tonne in early 2019.

China export volume FM in 2018-2019 Aug
Mag1  
Source: China Customs 

China export volume of DBM in 2018-2019 Aug 
Mag2  
Source: China Customs 

China export volume of CCM in 2018-2019 Aug 
Mag3  
Source: China Customs 

European steel struggles with heavy stocks

Falling European steel production, ample magnesia supplies, and heavy stocks have added up to a perfect storm for European magnesia markets. 

When European magnesia prices rose sharply in early 2018, buying accelerated rapidly, as consumers attempted to get ahead of future price rises. 

The result has been a heavy build-up of stocks, which the industry is still struggling to consume, while demand from the steel industry lags. 

According to the World Steel Association (Worldsteel), European steel production was down by 2.2% year on year in August 2019. 

Lower demand is driving this drop in European steel production. Worldsteel in October forecast total 2019 steel demand in the European Union to fall by 1.2% year on year. 

Steel consumption has been undermined by sharp fall in activity in the automotive sector, which is the result of a general slowdown in manufacturing, shifts in consumer car preferences and wider economic uncertainty caused by trade and geopolitical tensions.

Passenger car production in Germany, Europe’s largest car producer, was down by 10.6% year on year between January and August 2019.

Europe’s steel industry is also facing heavy competition from China. 

On October 8, the Spanish industrial minister Reyes Maroto sent a letter to the European Commission asking for a review of "safeguard measures" on steel products coming into Europe.

The letter suggested that steel imports from China were shutting down local production. 

On October 13, the EU imposed an anti-dumping tariff on steel road wheel imports from China and is considering slapping tariffs on further products, including hot-rolled steel, stainless steel sheets and coils. 

All this is bad news for magnesia producers, in China and globally, which rely on the steel market as the main driver of magnesia-refractories demand.

At the same time, large volumes of magnesia production are understood to be coming online in China. 

This provides buyers with little incentive to purchase anything more than hand-to-mouth quantities, and even this is being limited by high inventories. 

Industry sources at UNITECR 2019 implied that incremental spot purchases could become the norm for refractory raw materials, including magnesia, for at least the next six months until the market balance shifts.

One European refractory producer told Fastmarkets that his company’s most recent FM purchase was in 2018. This purchase had been expected to meet the company’s needs for six months. Instead, the company was now not expecting to buy again before 2020.

Another refractories producer has bought magnesia in recent months "but I’m the only one who has," it claimed. 

The source said that it made purchases to meet short-term needs, despite limited demand for refractory products. The buyer added that it was not expecting inventories to start building again until the start of next year at the earliest.