Impact of China’s environmental push on mineral downstream sectors

By Carrie Shi, Sybil Pan
Published: Tuesday, 04 February 2020

Most provinces in China are still facing strict environmental restrictions during the winter months, with raw materials production and demand from the downstream sector affected to some degree, report Carrie Shi and Sybil Pan.

China’s central government has imposed strict environmental restrictions and carried out inspections on heavy industries since 2019 in provinces including Shanxi, Liaoning and Shandong, as part of China’s 'Blue Sky Protection Campaign’. This is a three-year plan, which started in July 2018, aimed at curbing environmental pollution and improving the air quality in China.

The government has continued its environmental push during the 2019-2020 autumn-winter season, from November 2019 to March 2020, to support the results achieved in the past two years. Most of China’s northern provinces are now subject to restrictions on key polluting industries such as steel, cement, glass and others.

These restrictions by the Chinese authorities on polluting industries are now hitting downstream demand for some refractory raw materials, and have negatively affected their production. The markets of these raw materials became quieter ahead of the Lunar New Year, with most market participants leaving for the holidays.

Magnesia in Liaoning 

Magnesia is a key raw material for refractories, which is widely used in kilns for smelting steel. Production curbs on end-markets including steel and cement during the winter heating season have led to a deterioration of the upstream magnesia market.  

With the Chinese New Year starting on January 24, factories were due to be closed until the Lantern Festival, which is celebrated on the fifteenth day of the first month in the lunar calendar, marking the last day of the Chinese New Year celebrations.

"Demand for magnesia has been affected by the slow downstream demand due to the environmental restrictions, and magnesia prices have been falling sharply since 2019 until now. With the approach of the Lunar New Year holiday, the market has become stagnant with no transactions  seen," a producer source told Fastmarkets.

Fastmarkets’ price assessment for magnesia, dead burned, 97.5% MgO, lump, fob China, was $400-450 per tonne on January 21, unchanged since December 17, but down from $1,100-1,300 per tonne at the start of 2019.

The stricter norms have led to remarkable signs of innovation in the magnesia industry. According to the Anshan Ecological Environment Bureau, some 1,246 magnesia kilns operated by 116 magnesia companies have been installed in Haicheng, Liaoning province, with on-line monitoring equipment. The data shows that the emission of pollutants from all these kilns is within the accepted thresholds.

"The air condition in Haicheng is better than it was before due to the environmental inspections, and I think the environmental inspections will remain strict in 2020," a second producer source said.

Fused alumina and bauxite 

Since the Code Red emergency response protocol at the beginning of November in Luoyang, Henan province, China’s fused alumina production hub has been under rigid environmental regulations. 

Factories were closed for the Chinese New Year holidays, but according to fused alumina producers in Henan province, normal production might be delayed until the end of the winter shutdown season.

In principle, a mass operation shutdown will result in a shortage of supply, which will support prices. But weak demand from the refractories sector has offset the tight supply for brown fused alumina (BFA) and its feedstock of refractory grade bauxite, leading to a relatively stable price trend for both.

Fastmarkets’ fortnightly assessment of alumina, fused brown, min 95% Al2O3, refractory sized (0-6mm), fob China, was at $720-730 per tonne on January 9, up $10 per tonne or 1.4% from its previously stable price of $710-720 per tonne.

Meanwhile, bauxite, refractory-grade, 85%/2.0/3.15-3.2 (0-6mm), fob Xingang, was assessed at $385-395 per tonne, up $5 per tonne or 1.3% from $380-390 per tonne, a level it has held at since the end of October. This price movement was mainly due to the appreciation of the Chinese yuan, according to market participants.

Shandong graphite production 

At the beginning of the winter season, the air quality in Shandong province was better than that in Henan, but that situation had changed by the end of the year. Graphite production in Shandong was not significantly affected by the environmental regulations until the end of December when local air quality deteriorated, according to market participants. 

This resulted in a suspension of production until the Chinese New Year holiday season. But some sources believe that the environmental curbs were not the only reason behind the closure of graphite factories. 

"Most graphite producers in Shandong stopped their production of the raw material in the second half of 2019 because of a weak end-market and a depletion of local resources," a graphite flake producer in Shandong province said.

The production suspension, as well as the seasonal halt in Heilongjiang province, have contributed to supply tightness of certain grades of graphite flake, which has helped offset the headwind brought about by a weak end-market. 

Fastmarkets’ assessment of graphite flake 94% C, +100 mesh, fob China, stood at $690 per tonne on January 16, unchanged since the middle of November. Prior to this, the price ticked up by $10 per tonne or 1.5% on supply tightness.