Stricter controls ease magnesia oversupply in China

By Carrie Shi
Published: Tuesday, 19 January 2021

Tighter controls on mining activity in China’s Liaoning province and strict environmental regulations have eased the oversupply of magnesia in the country, stirring up an optimistic price outlook for 2021.

Chinese magnesia prices were under pressure during the first half of 2020 due to a combination of excess supply and weak demand from the downstream refractory sector, with the latter severely affected by the Covid-19 pandemic. And while many magnesia producers in China operated at less than 50% capacity or halted production entirely due to the challenging market conditions, an accumulation of stocks in the market maintained downward pressure on prices in the first half of the year.

With capacity to produce nearly 20 million tonnes per year of magnesia, China is the world’s top supplier of the material and its oversupplied domestic market had been an unsettling problem for the global industry ever since more than 3 million tonnes of floatation production lines were added in 2018, in response to magnesia prices surging to historic highs in the prior year.

This problem of overcapacity was exacerbated this year by the Covid-19 pandemic, which resulted in a slowdown in buying activity, with most buyers purchasing less than 50% of their usual volumes.This saw producer stocks at warehouses climb by around 5 million tonnes, which could cover several months of consumption, market sources said.

Magnesia, fused, 97% MgO, Ca:Si 2:1, lump, fob China

To deal with this overcapacity, the Liaoning provincial government stepped up its efforts to promote the healthy development of the market by introducing restrictions on magnesite mining activities in July, in a bid to reduce the amount of magnesia in the country.
After relying solely on existing magnesia stocks with producers not being able to mine more material due to a halt on opencast magnesite mining using explosives, availability of magnesia in the Chinese domestic market declined in the second half of 2020 and the oversupplied conditions have greatly eased, market sources told Fastmarkets.

Moreover, Liaoning’s provincial government together with authorities of different cities in the province continued to push for consolidation of the domestic magnesia industry by implementing quotas on magnesite production to curb overall output. 

Also, in the second half of the year, authorities carried out stricter environmental checks in Dashiqiao and Haicheng, two key magnesia production hubs, and ordered producers that did not meet environmental standards to halt operations. These actions sent positive signals to China’s magnesia market and underpinned prices as a whole.

Additionally, cheaper material disappeared from the market following the halts at some small-sized producers, allowing for sellers to insist on higher prices for dead burned magnesia, fused magnesia and caustic calcined magnesia for the first time this year in the middle of November.

Fastmarkets assessed the magnesia, fused, 97% MgO, Ca:Si 2:1, lump, fob China price at $500-580 per tonne on December 15, steady week on week but up from $470-550 per tonne at the start of the month. The assessment had been as low as $450-550 per tonne on August 18, a level which it held for 12 straight weeks before eventually nudging higher to $460-550 per tonne on November 17. Prices still remain below where they started the year, at $520-620 per tonne on January 7.

Similarly, dead burned magnesia prices in China had also trended downward throughout the year before ticking up in mid-November; Fastmarkets’ price assessment for magnesia, dead burned, 97.5% MgO, lump, fob China was at $330-370 per tonne on December 15, up from $310-350 per tonne at the start of December. This is up from a low of $300-350 per tonne on August 18, but still below the level of $400-450 per tonne where it started the year.

"After banning explosives in mining and carrying out strict environmental inspections, there is not much material available on hand with more companies halting production near the year-end. Most magnesia prices are moving up due to tight supply," a producer source told Fastmarkets.

The industrial heartland of Yingkou, Liaoning, China

Most caustic calcined magnesia producers also increased their offers because they had halted production so that they could complete upgrading to ensure their equipment complies with the latest desulfurization and denitrification standards. The government requires producers meet these standards before January 2021 or else they will not be able to resume production, market sources said.

Fastmarkets' price assessment for magnesia, calcined, 90-92% MgO, fob China was $130-160 per tonne on December 8, up from $120-150 per tonne a week earlier. That assessment is up from a low of $110-150 per tonne on August 18, but still down from $140-180 per tonne on January 7.

Stricter regulations
Because most magnesite resources and magnesia-processing companies are located in Yingkou and Anshan, cities in Liaoning, provincial and local authorities have continued their environmental efforts with a series of inspections carried out in both cities since September this year.

The inspections began in Anshan, with a new round of checks of heavy industries launched in the middle of September. Liaoning’s first environmental inspection team went to Anshan over September 13-28 to supervise local environmental regulations and improve air quality. Many small-sized magnesia producers that use heavily polluting kilns were ordered to halt operations so as to update their equipment to meet emissions standards. 

On September 28, the local government of Dashiqiao under the city of Anshan began a three-month environmental inspection of the magnesia industry to monitor pollution levels. During the first round of inspections until November 14, the local government closed 92 of the 537 magnesia-focused companies that operate in Dashiqiao because they did not meet the required environmental standards. Moreover, in the second round of inspections in Dashiqiao from November 14 to December 8, the local government ordered 116 magnesia companies to suspend production to update plants and maintain equipment. 

Meanwhile, the local government in Haicheng, also in Anshan, held a meeting on December 7 to discuss plans for the launching of environmental inspections to supervise local magnesia companies.

"I think the recent environmental inspections within Liaoning province are the strictest because more magnesia enterprises have to halt production to update plants and equipment to meet the required standard. Most magnesia producers insist on higher offering prices due to low availability of materials on hand, and some have even stopped offering for the time being," a trader said.

Optimistic outlook for 2021
With downstream buyers consuming accumulated magnesia stocks in China since July due to the mining curbs that resulted in reduced availability of new material, the domestic market is not as oversupplied as it once was, according to most market participants. 

Coupled with expectations that strict governmental inspections will continue next year, this has led to a more optimistic outlook for magnesia prices in 2021.

Most producers expect an increase of at least 30% in prices for 2021 compared with current levels. Buyers, on the other hand, remain more cautious but agree that prices may rise in the first quarter of 2021 because most producers in China may still not have resumed normal production by that time. In terms of the longer-term outlook, participants said it was difficult to gauge where prices will be due to the uncertainty surrounding the Covid-19 pandemic and what sort of impact it may have on demand.

Moreover, plans to consolidate the Chinese magnesia industry will continue in 2021 with the Liaoning provincial government planning to implement annual production quotas to ensure greater control on total output. Liaoning province would form just two or three magnesite mining groups with integration carried out at county and district levels, and newly-built magnesite mines must reach a minimum mining scale of 300,000 tpy. The industry consolidation will strictly control the increase in magnesite mines and magnesia capacity, which could also support the industry as a whole.

"Domestic sales have been increasing in recent weeks because buyers are purchasing more material in fear of further price increases. Overseas demand has also recovered slightly with increasing inquiries and orders from Asian buyers, but due to high freight fees, demand from Europe and the United States remains flat. Considering the strict environmental regulations will continue in 2021, the tight supply situation should persist for a while. We will insist on higher prices and it will be hard to guarantee large volumes of supply," a second producer source said.

"Our suppliers inform us that prices will increase by $30 per tonne or even higher in the first quarter of 2021 because most production will still be halted to update equipment to reach environmental standards. I think prices will be still firm in the first quarter in 2021, but as for how high it could reach, I think it will not surge in a large range because it is hard to say whether downstream demand will recover further next year due to the uncertain impact from the global Covid-19 pandemic," a buyer said.