Chinese magnesia prices challenge other producing regions

By William Clarke
Published: Wednesday, 09 September 2020

The European magnesia markets have been very sluggish so far in 2020, with the Covid-19 pandemic striking while consumers were trying to cut back swollen inventories.

Magnesia consumers in Europe have been working through large inventories since 2019, after a period of active buying in 2018 when refractory producers and steel companies built up their stocks in response to higher prices at that time.

Market sources began 2020 looking for stabilization in the market, if not recovery, after refractory consumers started to trim down their swollen inventories. The Covid-19 pandemic, however, heavily disrupted the global steel market, which is one of the main drivers behind magnesia demand.

The combination of temporary lockdowns in key producing areas, as well as the broader economic uncertainty and fears for the future of the automotive and construction industries, has brought about a sharp drop in steel production this year.

Magnesia is used as a refractory material in the bricks and cement in the construction of furnaces for steelmaking. Consequently, while steel producers experienced tightening margins and slower production, refractory purchases slowed. This, in turn, drove lower refractory product manufacturing and, therefore, less demand for refractory raw materials.

For example, steel production in the EU was only 10.16 million tonnes in June 2020, down by 24.6% year-on-year, data from the World Steel Association (Worldsteel) showed. Furthermore, over the first six months of 2020, steel output in the region was 68.28 million tonnes, down by 18.7% year-on-year.

Turkish steel production has been relatively more resilient than EU output. This reached 2.8 million tonnes in June 2020, up by 4.1% year-on-year, Worldsteel data showed. Production in the first six months of 2020 was 16.29 million tonnes, down by 4.1% year-on-year.

In August, industrial mineral group Imerys announced that it was to buy Turkish refractory producer Haznedar and expected the deal to close in the fourth quarter of 2020, subject to regulatory approval. Imerys said that the deal would "strengthen its position within the attractive and growing Turkish market."

Steel output in the Commonwealth of Independent States, which includes Russia and Ukraine, was 7.95 million tonnes in June, a 5% year-on-year decline. Output in the first six months of 2020 was down by 4.1% year-on-year, to 48.92 million tonnes.

Demand from the cement sector, another major refractory purchaser, has also been slower due to the major uncertainty over prospects for the construction sector amid the Covid-19 pandemic, and while European markets slipped into recession.

Overshadowed by China

Exports from China, the world’s leading magnesia producer, have continued to lead the direction of prices in Europe, with magnesia produced in Europe remaining more expensive than Chinese product.

Fastmarkets assessed the price of magnesia, fused, 97% MgO, cif Europe, at $500-650 per tonne on August 18, down from $550-700 per tonne on July 21. The corresponding price assessment for magnesia, fused, 98% MgO, lump, fob China, was $550-650 per tonne on August 18, down from $580-680 per tonne the week before.

The prices of material from Russia and Turkey have been less volatile than Chinese prices due to a less active spot market and a greater reliance on long-term contracts, which have failed to match the drop in fob prices in China.

Magnesia producers in Europe have struggled to emulate the low cost of production for Chinese miners and processors. In early 2020, for example, refractory producer RHI Magnesita suspended its fused-magnesia production facilities in Posgrunn, Norway, and Contagem, Brazil, and entered long-term supply arrangements to meet demand for the material.

Magnesia end-users have reported that the disruption following the Covid-19 pandemic slowed the rate of depletion of the high stocks in Europe to a crawl. Sources were unclear, however, on just how low the stocks have fallen because of the lack of new purchases that would show a gauge of customer demand.

"We think [end-user] stocks are getting low," one refractory producer told Fastmarkets in August. "But we haven’t seen much buying yet. We were expecting purchases to have restarted months ago, but now it’s hard to say."

On August 18, 2020, Fastmarkets reported the price of magnesia, fused, 97% MgO, cif Europe, at $500-650 per tonne, down by 41% compared with $900-1,050 per tonne a year earlier on August 20. The price for Chinese imported material was represented by the bottom end of that range, while supply from the eastern Mediterranean was still trading at a higher level.

"Chinese dead burned magnesia is so cheap now that I don’t see how anyone has any margins," a European trader told Fastmarkets. "Fused magnesia is tracking lower, but it’s dead burned magnesia that’s adding the real pressure… [European sellers] have a different business model. They just can’t match Chinese prices."

European dead burned magnesia prices have declined less sharply at 22% year-on-year, with Fastmarkets assessing the price of magnesia, dead burned, 95% MgO, fob Europe, at $400-500 per tonne on August 18, compared with $500-600 per tonne a year earlier on August 20, 2019.

The aforementioned European trader was cautiously optimistic that activity could restart later in the year, however.

"The summer [slowdown] started earlier this year and it will last longer," the trader said, "but we hope to see a return to activity eventually."

This article was first published in the September 2020 issue of Metal Market Magazine, which carries in-depth feature articles, analyses and reviews of metal and steel markets.