Uncertainty about China’s magnesia market drivers encourages caution

Although the price of some grades of magnesia in China drifted lower in late November and early December 2021, most magnesia prices had just hit a two-year high due to supply constraints caused by a series of factors, including industrial policies such as strict environmental regulations, power cuts, and rising production costs resulting from higher coal prices.

Overcapacity in China’s magnesia market has been a long-term problem in recent years, with accumulated stocks usually at a high level around 5 million tonnes, according to sources.

The Liaoning provincial government continued its efforts in 2021 to promote the healthy development of the market, and introduced continuous environmental restrictions on magnesite mining activities.

Under strict environmental regulations, supplies for caustic calcined magnesia and dead burned magnesia have been squeezed, with some small producers stopping production after having failed to reach the environmental standards.

At the same time, falling production caused by higher coal prices, especially in September and October, together with suspended production amid snowy weather during winter, pushed magnesia prices upward at the end of 2021.

Fastmarkets’ price assessment for magnesia, dead burned, 97.5% MgO, lump, fob China, was $580-630 per tonne on December 7, unchanged since October 26, but up from $380-450 per tonne at the start of January 2021. This was similar to the $550-650 per tonne reached on September 17, 2019.

Fastmarkets’ price assessment for magnesia, calcined, 90-92% MgO, fob China, was $220-270 per tonne on December 7, unchanged since November 9, but up from $150-180 per tonne on January 5, 2021.

High stocks were rapidly consumed, especially for fused magnesia, from late September until early November because of production halts among magnesia producers when there were power cuts for around one month in Liaoning province.

Production of fused magnesia recovered from November 5, following the end of the power cuts, and magnesia prices fell to a more reasonable level from a previous surge in October. But market participants were uncertain whether there would be further power cuts in 2022, and remained cautious.

"Whether there will be some power cuts policy coming in 2022, currently it is hard to say. As production of fused magnesia requires lots of electricity, a power cuts policy will have big effect on it," a producer said.

Fastmarkets assessed the price of magnesia, fused, 97% MgO, Ca:Si 2:1, lump, fob China, at $850-900 per tonne on December 7, down by $50 per tonne from $900-950 per tonne a week earlier, but up from $550-630 per tonne at the start of 2021. This was also similar to the level of $850-950 per tonne on August 20, 2019.

Many uncertain factors

In addition to the uncertainty about power cuts policy in 2022, several other factors in the magnesia industry - such as electricity fee reform in Liaoning, the consequences for production during the Winter Olympics, and consolidation in the industry - have made most market participants cautious.

First, the latest reform of electricity fees caused some concerns about magnesia production costs, especially for the fused magnesia sector. Liaoning carried out electricity reform in December and collected electricity fees for different time periods.

The Liaoning government divides electricity consumption in the province into four periods – low, normal, high and peak consumption – and has announced price changes for each time period.

The high consumption period, from 7:30am to 11:30am and 7:00pm to 9:00pm, attracts a price 50% higher than the average electricity price during the normal consumption periods of 5:00am-7:30am, 11:30am-5:00 pm and 9:00pm-10:00pm. For the peak period of 5:00pm-7:00pm, the cost of electricity will be higher than the high consumption period by an additional 25%. But for the low consumption period, 10:00pm-5:00am, electricity prices will be 50% lower than that normal period.

Because the electricity fee reform was due to last only for the month of December 2021, at the time of writing the reform has not had any significant effect on magnesia prices, but market participants wondered whether there would be more changes in 2022.

"There are lots of uncertainties in the magnesia market, and we don’t know whether electricity fees will go even higher in 2022, which will keep raising the production cost for magnesia, especially fused magnesia. We are still waiting to see whether the government will have further changes for electricity fees for next year," a second producer told Fastmarkets.

Second, the possibility of a halt in production during the Winter Olympics in early 2022 stirred up supply concerns for the first quarter of the year. Most producers in Liaoning received verbal notice that magnesia production might stop, to guarantee better air quality from the middle of January until early March, because of the Winter Olympic Games being held in February 2022.

"Magnesia supply will be constrained in the first quarter of 2022 if production totally halts during the Winter Olympics period, but because there is still no specific notice – just a verbal notice, according to our suppliers – we will take a watchful attitude," a magnesia buyer said.

Third, the consolidation in magnesia consolidation will continue in 2022, and if further progress is made, magnesia prices would be supported to some degree. The Liaoning government, together with authorities in different cities in the province, continued to push for the consolidation of the domestic magnesia industry throughout 2021 by trying to implement quotas on magnesite production to curb overall output.

In September, Liaoning’s government made plans to reduce the number of magnesite mining rights to 23 from 40 in Haicheng, and it will also try to achieve its target of having just two mining groups in Haicheng more quickly.

Furthermore, the local government in the city of Anshan, in Liaoning’s Xiuyan county, released its latest plan for consolidation of the magnesite industry on September 2. In this process, Xiuyan will go from 23 magnesite mining rights to 14.

"Next year, Liaoning’s government will definitely keep pushing the consolidation plan for magnesia, and if more progress is made, the market is expected to become firm, supported by more centralization of the industry," a third producer said.

Mixed views for 2022

Given the uncertainties about the effects of industrial policies on the magnesia industry in 2022, most producers expect firm or higher magnesia prices during the year because of the potential tensions in supply.

"I think magnesia prices will not fall, and will stay firm in 2022 because the magnesia market is a policy-led industry at the moment. If policies such as power cuts are carried out again, or electricity fees rise further, magnesia supply and production costs will be affected," a fourth producer said.

But some downstream buyers were cautious, expecting lower prices from the second quarter of 2022, but they will also remain vigilant over policy changes.

"The Winter Olympics in China will possibly affect magnesia supply in the first quarter, but I think prices will become soft after that because supply will largely be unaffected by other factors, in my opinion," a second buyer said.

"I think magnesia prices will be mostly firm until March 2022, but then a decrease will start," a distributor added. "But prices will fluctuate through 2022 depending on environmental factors and other industrial policies set by China’s government. I’m not really sure about the exact trend."