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China's magnesia recovery slows

Jan 07, 2020 | 05:00 AM |


Overcapacity in China’s magnesia sector and shrinking international demand have roiled the domestic market this year, dragging prices to a two-year low and prompting producers to lower output, reports Carrie Shi

Fastmarkets’ price assessment for magnesia, fused, 97% MgO, Ca:Si 2:1, lump, fob China was $550-650 per tonne on November 26, down by around 65% from $1,600-1,800 per tonne at the end of 2017.

Magnesia prices were low for many years until 2017 because of uncontrolled domestic competition for market share against a backdrop of excess capacity. Capacity was around 20 million tonnes per year at its peak, according to market participants. Prices subsequently surged to a historical peak two years ago due to the government’s imposition of mining controls and a ban on extracting magnesite by using explosives at that time, creating a short-term shortage of material.

Unable to operate with explosives to access deep-lying high-quality ores, producers turned to using drilling equipment to source magnesite or added more flotation lines that can process low-grade ore to produce qualified magnesia. This caused supply to drop, triggering the sharp increase in prices.

From a very low base, combined capacity at the magnesia flotation production lines – built and planned since the mining controls were introduced in 2017 – in Liaoning province has ballooned to 6 million tpy, Liaoning Special Resources Industry Development Center said in September. The Center is a subsidiary of Liaoning Provincial Committee of Industry and Information Technology, which is responsible for the protection and management of magnesium, boron, talc, bentonite, jade and other industrial special resources in the province.

Total capacity for all types of magnesia in Liaoning province – the country’s magnesia production hub, accounting for more than 90% of total domestic capacity – exceeds 28 million tpy, but the utilization rate there is currently below 50%. Market participants estimate that 2019 production will be around 14 million tonnes, including caustic calcined magnesia, dead burned magnesia and fused magnesia. China’s magnesia output typically accounts for more than 60% of global production.

“Increasing flotation production lines for magnesia has brought more stock to the spot market,” a Chinese magnesia producer told Fastmarkets. “Our operating rate is around 50% now and it is quite hard to sell under current sluggish market conditions.”

Environmental regulations

The Liaoning government has aligned its efforts to regulate the local magnesia industry with central government targets on controlling pollution and promoting the healthy development of markets. In the production hub of Haicheng in the state, strict mining controls from 2017 to 2018 prohibited the extraction of magnesite using explosives. As well, all magnesite mining was suspended for more than 18 months during 2017-2018 while environment inspections and safety checks were carried out.

In 2019, although some major producers received explosives earlier in the year, their use was limited to rock stripping. And between August 1 and October 31, the government enforced another three-month halt on magnesite mining to coincide with a national holiday in China.



Still, prices were pressured lower by the presence of stocks that had accumulated previously. As well, Daishiqiao and Xiuyan – two other magnesia production hubs in Liaoning province – did not ban magnesite mining outright, given producers there easy access to raw magnesite ore for processing.

“Due to sufficient supply and inventory, the stoppage of magnesite mining in Haicheng had a limited effect on supporting magnesia prices. We have no choice but to lower prices to secure deals in such a quiet market,” a second producer said. “I heard talk about stopping all magnesite in Liaoning province – not only in the Haicheng region – but I’m not sure whether it will officially be carried out next year,” the second producer added.

Outlook

Accumulated overcapacity will continue to put downward pressure on prices alongside weak demand – especially for fused magnesia – from sluggish end-use sectors such as steel, cement and glass. According to official Chinese customs data, China exported 304,898 tonnes of fused magnesia in the first 10 months of 2019, down 30.2% from 436,722 tonnes a year earlier.

Any recovery in the magnesia market will take some time to emerge, market participants agree. “With the approach of the Christmas holiday in December and Lunar New Year in January 2020, the magnesia market will not recover in the short term,” a third Chinese producer said. “I don’t think a recovery will happen in the first quarter of 2020.”

“Because most producers are still suffering from high stocks and reduced buying from downstream buyers, I think it will be hard for the whole magnesia market to pick up in the first half of next year,” a buyer added.

By Carrie Shi

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