China’s energy crisis and pollution control curbs are playing havoc with a range of commodities, including some that have been slept on by mainstream investors.

While we are all familiar with the radical impact steel refinery closures and curbs in Xi’s China are having on iron ore, our most valuable export, the impact to supply chains is being felt right across the world.

These cuts have also struck magnesium smelters in Shaanxi, a Chinese industrial hub where pollution controls are being targeted to both clear ambitious Communist Party CO2 reduction targets and remove the smog which threatens to obscure blue skies at February’s Beijing Winter Olympics.

Magnesium is a small market at around 1Mtpa, and because mining and refining of the lightweight metal is so heavily concentrated in China, it is only lightly covered by trading houses overseas.

But it is a crucial market in the auto and aerospace sectors, where mag alloy makes up 5-6% of the aluminium sheets that are now commonplace in new car builds, of both the electric and conventional variety.

The Yulin Municipal Government has called on around 30 magnesium smelters in Shaanxi to halve production until the end of the year, with 15 ordered to mothball their operations entirely in a bid to conserve power.

The region accounts for around 60% of China’s magnesium output, and that is a huge issue for supply chains, sending prices soaring to unsustainable levels.


IMA hopes prices subside in 2022

The International Magnesium Association has sounded the alarm on higher prices caused by what was a sudden and unexpected supply crunch.

Prices are now above US$5000/t, around double the contract levels signed between Chinese smelters and their customers.

In an open letter to magnesium end users, IMA president Rick McQueary signalled the industry body’s concern about the hit to customer confidence from the supply and subsequent price shock, insisting prices would go down next year.

He described the increase to prices as “almost unprecedented”.

“While IMA is very concerned about the short-term impact of capacity reductions and price increases on the growth of the industry, we want to encourage magnesium users to continue to take a long-term view despite the current situation,” he said.

“We believe the long-term benefits of magnesium still outweigh the short-term capacity and price imbalances.

“While no one can predict, with any certainty, where prices will be in the coming months, we can look back in history and see that significant price changes were always followed with price reductions.

“It is our view that prices are likely to continue upward in the next few months but will return to more normal levels by the end of the first half of 2022.”


China’s struggles highlight need to diversify supply

There are only a handful of current or likely producers outside China, including Victorian-focused and ASX-listed Latrobe Magnesium (ASX:LMG).

It plans to develop a 3000tpa operation which will convert fly ash from the Yallourn coal operations in the Latrobe Valley into magnesium and a host of other industrial products.

Managing director David Paterson said with the cost of inputs like coal and ferrosilicone spiralling out of control in China, many magnesium producers have stopped delivering into US$2500/t contracts because their cost of production is now streaking ahead of prices.

Cue a mad rush from producers to source magnesium wherever they can find it.

Latrobe still has engineering and other studies to complete before issuing tenders for construction of its plant in January next year, but Paterson said end users facing supply woes out of China were already desperate to get their hands on mag product.

“That’s why we keep on talking about diversity of supply,” he told Stockhead.

“We’ve had probably at least three or four inquiries a week, probably one a day.

“We’ve had two today just on can we supply mag at a price, at any price, because they can’t get supply.

“And the problem you have now with magnesium of course being you need 5% of mag in aluminium sheet, so I’ve heard through our US distributor that they’ve actually stopped the supply of 5000 series of aluminium because that requires the 5-6% mag, and they can’t get it.”

That means problems for carmakers already facing a semiconductor chip shortage, who have engineered multi-billion dollar production lines around the availability of aluminium sheet.


Power issues expose China’s climate battle

Action on CO2 emissions is catching up with industries like magnesium in China, which has been reliant on coal power to fuel its rapid economic growth.

Each tonne of mag produced in China equates to 21t of CO2.

“So what happens in magnesium is a lot of the plants work off coke gas, which come off the adjacent steel refineries and they use that as a source of energy,” Paterson says.

“There’s 10 tonnes of coal to a ton of mag, so when you have to buy coal in you can add another at least another 10t of CO2 in that mag.

“And that also pushes prices up … and it pushes the cost up.”

Latrobe’s product promises to be cleaner than China’s on that front, but it does raise the prospect that Chinese smelters may face more emissions crackdowns and power rationing in the future.

Paterson believes mag prices will come down long-term to US$2500-3000/t, but that also depends on industrial policy settings in China stabilising.

“It really depends on these cost structures that the Chinese are bringing on their producers,” Paterson said.

“They’re sustaining (the production cuts) for this year.

“So when we talk 2022, it will probably stay up and then hopefully come back to some sort of normality later in 2022.

“But that’s still to be seen, because China is still pushing ahead.

“We’ve known about this for a while, stopping production. It depends if they keep doing that, which will push the price back up.”