Those with long memories in the magnesium industry may recall the last major price rally magnesium went through back in 1994/5. That rally had been sparked by Dow Chemical’s unexpected announcement of the closure of their US facilities. The price peaked around $2.30/lb only to fall back to $0.60-0.80/lb in the following years. Consequently, new investment in magnesium facilities during the 1990’s were few and far between with only the Chinese quietly adding capacity so that by the early part of this decade, China had become the dominant producer of magnesium metal. Today out of a global production of some 670,000 metric tons, China produces 500,000 with producers two, three and four ” Russia, Israel and Kazakhstan languish far behind with 50,000, 28,000 and 20,000 tons of capacity respectively.
So it comes as no surprise that China calls the shots in the global magnesium market even though the main sources of supply for the US include Israel and Russia for primary metal and Canada for alloys, following anti-dumping cases brought against Chinese producers to protect domestic US mills. As we know, a weaker US dollar means exports are up and imports slightly down but the world price (and hence ultimately the US price) is set by supply and demand out of China. And in spite of the massive production capacity, China is consistent with supply volumes. Fear of further disruption has been driving up prices again. In the US spot prices have risen from 1.40/lb at the beginning of 2007 to $2.25/lb by year end. It has since traded over $3/lb during the 1st quarter and expansion plans by US producers have been announced almost weekly.
Demand is set to grow at a compound rate of 7.3% per annum from 2007 to 2012 driven by attributes such as its light weight (35% lighter than even aluminum) high strength, durability and ease of casting in laptops, mobile phones and automotive applications. About 36% of Magnesium is used in 5000 series aluminum alloys, 32% directly as die cast products and some 16% consumed removing sulphur in iron and steel production. But whereas growth is estimated at about 2% in the US and 3.5% in the rest of the world it is 20% in China. Not surprisingly net expansion plans in the US are minimal with 9,000 tons planned by US Magnesium while older plants like Lunt Manufacturing in Hampshire and Schaumburg, IL will close this year. China on the other hand is scheduled to add some 30,000 tons this year just to meet rising demand.
And here is the issue – many of China’s Magnesium plants are within an 8 hour drive of Beijing. They are already coming under pressure to reduce environmental emissions in the run up to the Olympics and have been told they will be closed before and during the games to improve air quality. With so much capacity taken out of the market, China may have no choice other than to import metal and those Russian, Kazak and Israeli producers will have the option, to continue to supply the US market or take the high spot prices an increasingly desperate Chinese market may be willing to pay. Price movements so far this year have largely been down to supply disruptions in the domestic Chinese market following a severe winter. We expect more of the same as those producers are required to cut back or close production as we come to summer. With a weak dollar US producers will be in a position to further extend the premium US consumers pay over Asian prices if excess world capacity is switched east. So watch out magnesium buyers!