Magnesium still considered a risky market; supply challenges loom: 2022 preview
Concerns about the state of the magnesium market have persisted into 2022 after a volatile 2021 – a year in which consumers had to contend with an acute shortage of material
Buyers this year face issues including low availability, stronger environmental controls and logistics constraints at a time of increased project development outside China.
With magnesium supply hit by rising coal costs in China, spot prices rallied by 157% on average between September and October. Given that China was producing around 90% of the world’s magnesium, the shortage caused concerns at aluminium smelters and diecasters in the West. European trade groups even warned of the potentially “catastrophic” effects of a magnesium supply shortage on metals producers in the region.
Since November, market prices have stabilized due to improved availability of material in European ports.
Fastmarkets assessed the price of magnesium 99.9%, in-whs Rotterdam at $8,100-8,600 per tonne on December 31, stable amid limited activity.
And in the first pricing session of 2022, on Friday January 7, Fastmarkets assessed it at $8,550-9,050 per tonne, up by 4.76% from the previous pricing session amid bullish sentiment from both traders and buyers.
Environmental inspections to continue
Environmental issues remain the main concern in China’s domestic magnesium market given the country’s determination to achieve carbon neutrality by 2060 and to cap CO2 emissions before 2030.
The upstream semi-coke industry in Shaanxi province’s Yulin city was blamed for serious environmental breaches by China’s Central Environmental Inspection Team following its checks in December.
Most local magnesium plants in Yulin were producing semi-coke themselves, and those plants are still operating as normal, market sources said. Nervousness over supply has continued, however, and China’s domestic magnesium price has moved up as a response.
Fastmarkets’ price assessment for magnesium, 99.9%, exw China was 50,000-53,000 yuan ($7,833-8,303) per tonne on January 7, up by 1,000-3,000 yuan per tonne, a 4% rise from 49,000-50,000 yuan per tonne a week earlier.
“The Inspection team has left,” a Chinese trader said. “Provincial and municipal authorities have organized meetings to discuss this issue. Market participants are waiting for policy guidance.”
“The magnesium industry is one of the pillar industries for Yulin city, which is China’s production hub for the metal,” the same source said. “Any strong measures, like production suspension for equipment upgrades, will cause chaos [in terms] of supply shortages and send the metal price roaring high.”
Magnesium plants are also required to upgrade their production facilities and adopt cleaner production techniques during the 14th Five-Year Plan period (2021-2025), sources said.
“Equipment upgrading takes time and costs money. We would expect a higher production cost for magnesium plants in the future,” a Chinese producer source from Shaanxi province said.
Some European market participants have had concerns about potential plant closures due to compliance with carbon emission targets ahead of China’s Winter Olympics in February.
Chinese producer sources in both Shanxi and Shaanxi provinces told Fastmarkets, however, that they will not cut output or suspend operations due to stricter environmental requirements for the Olympics.
Magnesium production in Shanxi province accounts for around 15% of China’s total output, and production in Shaanxi province accounts for more than 60%, market sources said.
The Shaanxi producer source told Fastmarkets that magnesium plants in Yulin had continued buying the raw material dolomite from neighbouring Shanxi province since October, fearing potential supply disruptions during the Olympics.
“The plant I work for has dolomite stocks that could be used for three months. I know other plants also have plenty of raw materials. The focus of [China’s] magnesium industry’s participants is the specific measures that will be taken to solve the environmental issues, which are not clear yet,” the Chinese producer source said.
Market participants in Europe were, however, quick to emphasize that even if they expect some supply constraints, they do not expect the shortage to be as severe as in the third quarter of 2021.
“[The market] is not going back to September levels of shortage; the market may be tight again, aggravated by logistics issues, but China closing all plants again – this cannot happen,” a European trader said. “The European Union and other parties have realized how important this strategic metal is, and any shortage won’t reach the previous levels.”
Middleman stockpiling triggers speculation
The sharp price fluctuations have also triggered more speculation, Fastmarkets has heard.
Throughout 2021, Chinese sources frequently mentioned some magnesium market participants with strong capital resources acting as “middlemen” and stockpiling material from producers and selling the metal to ordinary traders at higher prices.
“Those speculators push up the overall price level in the market and earn a profit by selling at higher prices. It is much easier and quicker to make money doing business in such a way,” a second Chinese trader said. “But such business activity disrupts the market and makes it difficult for ordinary participants to do business; it can’t be sustained.”
Magnesium considered a risk ahead of strong demand
With increased output of downstream automobiles and electric vehicles (EV), market participants in the magnesium and aluminium alloy market – which account for about 50% of the total magnesium metal consumption – expect firm demand this year.
According to the China Association of Automobile Manufacturers (CAAM), the country produced about 2.59 million automobiles in November and 23.17 million in January-November, an increase of 10.9% and 3.5% from the previous month the previous year respectively.
Amid firm demand and since the drastic price increase in the autumn of 2021, magnesium has been identified as a potential risk for the aluminium industry. This has forced change in the 2022 supply contract structure to mitigate upside production-cost risks.
Historically, premiums for alloys such as aluminium primary foundry alloy silicon 7 ingot in Europe, are typically baked into a contract under a conversion cost on top of the underlying P1020 premium.
But, as a result of the risk, producers have carved out the magnesium portions of their longer-term contracts, pegging them to a published or magnesium price instead and switching from a fixed price to a floating price.
“For [aluminium] primary foundry alloys, the changes are mainly on the magnesium and silicon and what QP we can offer,” an aluminium alloy producer said. “We have two options – we’re giving a fixed premium number for a quarter and not more. If someone wants to book more than that, it’s on an M-2 or M-3 basis [for the formula-based magnesium and silicon compartments].”
“This year we can’t do any fixed contract for over one year,” the producer added.
Some traders were buying extra inventories on a shipment basis during the last two months of 2021, to avoid any supply disruption to the extent possible.
“[We are] taking stock,” a second European trader reported. “With the current risk, we bought more and plan to keep more in stock. We are buying ahead more.”
By the time of publication, traders were finding it difficult to obtain material from the main non-Chinese origins in Turkey and Israel. Most of the material had already been sold in long-term contracts, sources told Fastmarkets.
Most magnesium consumers were said to be covered for the first quarter of 2022, but not beyond that, market participants reported.
New projects could ease supply constraints – but not just yet
End-consumers, especially within the automotive industry, are looking to diversify supply to avoid risk while at the same time reducing emissions. The so-called “green magnesium” – usually derived from the recovery of mine residue to be transformed by electrolysis – is seen as a solution compared to thermal processing, which is cheaper to produce but far more polluting.
New projects in Canada and Australia are under development at different stages.
Some plants are in the process of ramping up. Canadian-based Alliance Magnesium, for example, is producing secondary magnesium by recycling scrap from the metal-processing industry.
The company is currently producing around 250-300 tonnes of magnesium per month and exporting it into the US market, trading house Wogen Resources, its sole distributor in the US, told Fastmarkets.
Alliance Magnesium’s planned production, once up to full speed, will be 1,000 metric tonnes per month, Wogen Resources said.
“They will target the European market at a later stage, possibly when the project goes into phase two of primary production, which moves up to approximately 35,000 tonnes in total,” Wogen Resources told Fastmarkets.
Other projects have accelerated as well since the October price spike.
Latrobe Magnesium (LMG), in Victoria’s Latrobe Valley in Australia, had its feasibility study approved last year. Production will start at 1,000-3,000 tonnes per year in the first quarter of 2023. It will then expand to 10,000 tonnes per year and eventually expand further, Latrobe Magnesium said.
After the price spike, LMG said it would expand its yet-to-be built demonstration plant to meet world demand.
“We already have offtakes with one party in Japan and one party in the US, so the initial 10,000 are gone,” David Paterson, chief executive officer of Latrobe Magnesium said in a recent webinar.
Another project is Korab Resources, which is currently in the permitting process for extracting magnesium deposits in Winchester Australia. The company announced in November an agreement with the Port of Darwin to export 30,000 tonnes of magnesium metal per year.
“If we had all permits in hand today, we could be ready to ship high purity magnesium metal in 2023,” Andrej K. Karpinski, Korab resources executive chairman, told Fastmarkets via email.
Justin Yang and Davide Ghilotti, in London, contributed to this report