As Chinese authorities continue the clampdown on polluting industries to clean up local operations, the focus is shifting to magnesia processors. After the rapid downfall in magnesia prices out of China following the scrapping of the quota system, some suggest the downtrend may be reversed if the shutdowns lead to a supply shortage.

China is proceeding at full steam in its programme to rid the country of highly-polluting and obsolete industrial practices in a bid to improve the environmental footprint of its operations with the focus of local authorities now shifting towards magnesia.

As IM reported earlier this week, local governments in Liaoning province – the main magnesia producing area in the north of the country – have sent inspectors to knock on the door of every magnesia producer to ensure their operations comply with pollution regulations.

Anshan and Haicheng have been the first two cities in Liaoning to be inspected. In Ashan, some 64 companies are due to receive a visit by the environmental task forces over the next several months. Those that are found in breach of regulations face hefty fines or temporary shutdowns to their plants.

In Haicheng, where all local magnesia processors have been checked by now, there are 95 companies operating 1,700 magnesia kilns in the city. Of these, 142 kilns were shut in January as a result of the inspections.

Industry sources are now wondering whether this may be the start of a process comparable to what was seen in bauxite and alumina last year, when continuous shutdowns led to shortages of bauxite for alumina refineries, which in turn severely curtailed supply to market.

Environmental efforts

Many of the regulations listing strict emission targets for industrial operations have been in place since 2012, although in practice they were not acted upon. This changed in early 2016 when, in a highly-publicised first string of inspections, the Chinese government set off on a widespread clampdown that continued throughout the year.

The government needs industrial operations to be run on natural gas, rather than coal in order to cut pollution levels. Many facilities found to be still operating with coal as their primary energy source have been forced to close.

In Xinmi city, in Henan province, the municipal government said in December that 85 local refractory factories were shut during 2016. Over the past two years, a total of 2,300 highly-polluting coal down-draft kilns were dismantled in the district.

From the summer months of 2016, a number of key mineral-producing areas in China, such as Henan, saw local operations inspected and, in the case of irregularities, shut for over a month.

The anti-pollution checks continued and affected, among others, output of brown fused (BFA) and white fused alumina (WFA), leading to spot prices for both commodity groups to increase towards year-end.

Reverse effect on prices

In the case of magnesia, the consequences of enforcing environmental policies may also come to affect market supply and prices – potentially reversing the downtrend seen since January, according to market participants.

In November, export quotas for Chinese magnesia disappeared from the government list for 2017. Then the state council approved an export tax adjustment on partial products, including the cancellation of export taxes on graphite, magnesia and magnesite.

This led to prices for most magnesia products – caustic calcined (CCM), dead burned (DBM) and fused magnesia (FM) – out of China to decrease sharply and, in some cases, chaotically.

While CCM 90-92% MgO FOB China fell by $40/tonne, CCM 94% dropped by as much as $180/tonne, and CCM 96% by around $200/tonne, to mention only a few grades.

Market participants elsewhere have been watching closely the developments taking place in China – which accounts for about half of global magnesia supply.

When the quotas were not renewed, operators immediately feared Chinese magnesia would flood the international market, instigating price wars and oversupply. Sources told IM at the time that China may have had a high stock situation domestically, which it was trying to ease by scrapping the quotas.

While prices from the country have indeed decreased, some western participants said they have so far not seen the dramatic knock-on effect they had first anticipated.

"I didn’t see many more sales running on the market than before," a German-based source told IM this week. "Some prices [into Europe] even remained stable."

The inspection-related shutdowns may prove to be a spanner in the works that could come to reverse the downward price trend.

"With the closing of production plants […] this would affect availability and push prices up again," the source added.

This view was echoed by other market participants, who wondered whether – as it happened in alumina/bauxite – the closures would affect output and lead to a shortage of product.

IM has heard this week that some of the large magnesia suppliers in China were starting to increase their prices once again, in expectation of production cuts. This claim remains unsubstantiated at the time of writing, but it does point to a sentiment that is markedly different from the bearish outlook that was first seen at the beginning of the year.