Steel output cuts and freight rates hit demand for Chinese magnesia

By Carrie Shi, Sofia Okun
Published: Wednesday, 15 September 2021

Demand for Chinese magnesia is expected to weaken, due to the country's steel production curbs in the second half of 2021, while logistics delays and rising freight fees increase in interest in material from other origins.

Global logistics issues, including increased freight cost 

Chinese magnesia prices were mostly stable in the first eight months of 2021, supported by tight supply amid strict environmental regulations and continuous restocking from downstream refractories makers, resulting from the Covid-19 pandemic.

But downstream demand for China’s magnesia is expected to weaken because of the country’s reduced steel output in the second half of this year, driven by decarbonization efforts and the hosting of the Winter Olympics in the first quarter of 2022, when new pollution control measures are likely to be imposed.

China is expected to reach peak carbon by 2030, and carbon neutrality by 2060. To help achieve this, in the second half of 2021, Chinese authorities have called for steel production to be kept to a level that does not exceed last year’s.

In July 2021, crude steel production globally and in China showed month-on-month decreases.

According to the World Steel Association (Worldsteel), China produced 86.8 million tonnes of steel in July, down by 7.56% from 93.9 million tonnes in June.

Demand for magnesia, a key raw material for refractories, is linked to crude steel output. As such, more market participants expect it to be difficult to raise China’s magnesia prices because of the weakness in downstream sectors. "Reducing steel output will definitely affect demand for refractories, which will in turn affect demand for refractory raw materials, so I think China’s magnesia prices will remain stable or soften over the rest of this year," a magnesia consumer source in China said.

Steel production, especially in Hebei province, is expected to be limited in the first quarter of 2022 by the Winter Olympics, which will also have the effect of slowing down purchasing activity for magnesia, market participants said.

"The coming 2022 Winter Olympics are expected to affect demand for magnesia, with production limits expected during the period, especially at steel mills in the area surrounding Beijing," a magnesia producer source told Fastmarkets.

"I heard that the Tangshan government has already begun to seek feedback from local steel mills about production cuts and pollution control measures. I think it will not affect magnesia production too much because Liaoning province, the production hub for magnesia, is some distance from Beijing and Hebei," he added.

No significant decrease in China’s magnesia prices is expected because of the strict environmental regulations at a time of continuing industry consolidation.

The provincial government in Liaoning stepped up its efforts to restrict magnesite mining activities, and a series of environmental regulations were introduced in the first eight months of 2021. Small-sized companies that failed to reach the required emissions standards gradually stopped production, which meant that some of the lowest prices in the market were no longer available.

The Liaoning government, together with authorities in different cities in the province, continued to push for the consolidation of the domestic magnesia industry by implementing quotas on magnesite production to curb overall output. This would also support magnesia prices.

"According to the local government in Liaoning, each city might have further policies to control magnesia production, so I think [the price of] magnesia will not decrease although short-term demand remains weak," a second magnesia producer source said.

"The price level is fine now, and can satisfy all parties. There are not many reasons for prices to go down," an overseas buyer of magnesia said.

Fastmarkets’ assessment of the spot price for magnesia, dead burned, 97.5% MgO, lump, fob China was $380-450 per tonne on August 24, unchanged since December 22, 2020.

The corresponding weekly price assessment for magnesia, fused, 97% MgO, Ca:Si 2:1, lump, fob China was $550-620 per tonne on August 24, down slightly from $550-630 per tonne on July 6, where it had been unchanged since January 5 this year.

Magnesia, dead burned, 97.5% MgO, lump, fob China 

 

Magnesia, fused, 97% MgO, cif Europe 

International steel recovery
Market participants expect a recovery in international steel markets after September, in contrast with China’s policy of reducing steel output.

In Europe, demand for heavy steel has been weak over the summer vacation period, but market participants expect it to recover in September, following the traditional cycle.

In the United States, market participants await a new round of price-increase announcements amid a tight spot market and the likelihood of a large federal infrastructure investment that will boost demand for US-made steel plate.

Although demand for refractory products is expected to be firm, and to increase in Europe and the US, the whole industry has been affected by problems with the availability of transport.

Global logistics issues, including increased freight costs amid a shortage of containers and vessels, are set to drive commodity prices further upward. One buyer described the situation as "an absolute nightmare."

Transportation costs put pressure on raw materials, and companies were expected to try to pass the costs to customers in the second half of 2021. Global refractory producers Vesuvius, RHI Magnesita and Saint-Gobain cited freight costs and increased raw material prices as a reason to raise their prices, in recent financial reports.

The Baltic Exchange Dry Index, used for bulk shipment prices, and the Shanghai Container Freight Index, used for container shipping, both peaked in August. "Until mid-next year, we will not see any improvement [as regards] containers and shipping," a European trader said.

Traders are paying double the price they did in March, the same trader said. Vessels are fully booked a month in advance, and customers are competing for space and offering premiums, a second European trader said.

When shipping magnesia, big bags in bulk are used instead of containers to reduce transportation costs, three market participants said.

Buyers cannot afford spontaneous purchases and need to order in advance, the first European trader said. "If you want to have material in January, you must buy it now," he added.

Non-Chinese magnesia
The production restrictions in China and the logistics challenges are driving demand for non-Chinese material, one producer source said. Three European market participants confirmed this.

"All the magnesia plants outside China are loaded," a European seller source said. The price for magnesia, fused, 97% MgO, cif Europe, increased to $600-700 per tonne on August 17, from $550-650 per tonne earlier in the summer, according to Fastmarkets’ assessments.

But the supply raw materials in the European market is tight. "Russian [market participants] have supply, but are keeping it to themselves; Brazil, Australia and Jordan have some, but this is not enough to replace Chinese supply," a European buyer said.

"We are seeing additional demand and we are sold out," an ex-China magnesia producer source said, attributing the increased demand to the situation in China, adding that bids have been heard from Japan, India, Europe, and both South and North America.