On 17th of September Chinese authorities ordered the closure of 18 magnesium plants in Shaanxi as part of plans to cut CO2 emissions.

Another 30 plants had their capacity was reduced to 50% until the end of December.

This is  a big deal. China produces around 85-90% of the world’s magnesium and the Shaanxi province alone produces 65%.

Latrobe Magnesium (ASX:LMG) CEO David Paterson said that supply to Europe, Japan and American has effectively been cut off – and there is no alternative options.

“China make about 900,000 tonnes and half of it gets exported half of its used internally, so if they’re reducing the major province’s capacity by a factor of 60%, then that means there’s not going to be a lot for the rest of the world,” he said.

“Japan is reliant of China for 40-50,000 tonnes, in North American – which includes Canada, the US and Mexico – they require about 150,000 tonnes and they’ve only got one producer.

“Then you’ve got the EU that has no producers and is importing about 160,000 tonnes.

“So, all of a sudden you have 40,000 tonnes a month cut off – where are we going to get it from and how big are the inventory stocks?”


The shortfall directly impacts car production

Magnesium is primarily used in to produce aluminium sheets for car panels. Without supply, car production is going to grind to a halt.

Paterson said he expects that Chinese car manufacturers will have sufficient supply, but the rest of the world will be struggling if the reduced magnesium plant production drags on.

German Chancellor Angela Merkel has already flagged that the country’s car manufacturers will run out of magnesium by the end of November and if supply isn’t reinstated it will hamstring their ability to produce cars.

Pricing has gone through the roof

Consequentially, magnesium prices have tripled, soaring as high as US$8,100/tonne on the 18th of October.

“The problem is that pricing has gone through the roof, so no one wants to buy at these prices,” Paterson said.

“It’s sitting around US$8000, and the problem is that the US has an anti-dumping duty, which effectively doubles that price in the US – so suddenly they’re paying north of US$15,000 a tonne which crazy.

“Traditionally, this time of year in the US, they do all the marketing and set prices to go under contract for 12 months.

“None of that’s happened this year. No one wants to lock in at those prices, and there’s been some issues with the US producer around production, so it’s a bit of a double whammy for them.

“And of course, there’s no supply in the EU so they’re just coping it at the moment and that’s why they’re not happy.”


Could the cuts extend into the new year?

There are some signs that the supply crisis could be easing, with reports that producers in Shaanxi have been gradually restoring output since the start of October are now running at about 70-80% of capacity.

Aluminum producer Norsk Hydro ASA on Tuesday said local teams in China are working with magnesium suppliers to secure volumes for next year, and that there are limited alternatives to supplies as China dominates production.

“China is basically attacking two things, high energy users and high CO2 emitters, and the Shaanxi is a growth province,” Paterson said.

“They talk about decarbonisation of heavy industry, and they talk about moving production to their aluminium valley where they want to run it all off hydro.

“So, I don’t know whether this is part of a transition plan towards that.

“It could last through to 2022, but if China wanted to turn production back on they could do it in 24 hours – if they wanted to.”

Whether or not the cuts extend out into the new year remain to be seen, but the hackles are already raised. Earlier this week China said that it would be ‘unrealistic’ for the country to meet the urgent demand in Europe and that its efforts to tackle CO2 emissions should be respected.


Latrobe expanding production to 10,000 tonnes

Developers like Latrobe are scrambling to meet demand.

“We’re in development mode. Even Alliance Magnesium in Canada is only about 6 months ahead of us in the construction process,” Paterson said.

“They’re bringing on it 18,000 tonnes per annum – versus the 400,000 tonnes per month you’re trying to find to balance the world.”

Latrobe is gearing up to commence construction of its 3,000 tonnes per annum demonstration plant in Victoria, but Paterson said they’re planning to scale it up to 10,000 tonnes because of the Chinese situation.

“In the last month we’ve had probably 20,000 tonnes per annum inquiry from some of the big aluminium users around the world,” he said.

“We’re not going to be in production until January 2023, and it’s basically all taken in offtake agreements anyway with our Japanese and our US distributor, but everyone is asking for us to keep them on the list because they need to diversify supply away from China.

“We recently put in an option to increase our plant up to 10,000 tonnes so we can actually fill some of this demand.

“We’ve got a long list of people that want it, so it’s not hard to sell mag and people increasingly want to diversify supply.”