The world s largest carmakers could face a potentially crippling shortage of aluminium, as China's power crisis threatens supplies of a key component used to make the lightweight metal.
Magnesium is an essential material for the production of aluminium alloys, used in everything from gearboxes, to steering columns, seat frames and fuel tank covers.
Owing to production restrictions in Europe, which has a near monopoly on the magnesium market, stockpiles of the metal are running dangerously low across China.
There are no substitutes for magnesium in aluminium sheet and billet production, said the analyst by Barclays, Amos Fletcher. Thirty-five per cent of downstream demand for magnesium is auto sheet — therefore if the supply of magnesium is reduced or eliminated, the entire auto industry will potentially be forced to stop. On Tuesday, Canadian metals company Matalco told its clients that magnesium availability had dried up and if the scarcity persisted it would have to reduce output of aluminium billet next year.
The warning from Matalco shows how the power crisis in China is impacting global supply chains, driving up the price of key industrial materials and fuelling inflation concerns.
While a shortage of semiconductors has been the main issue faced by the automotive industry in this year, the focus is now shifting to magnesium, which increases the strength of aluminium when added as an alloying agent.
A magnesium shortage could cause a shortage of usable aluminium, which could also be used to hit auto production, said analysts at BofA Securities in a report. We at this point emphasise that such a scenario is not yet included in our estimates. The issue just emerged and as yet no carmaker warned about it. Around 85 per cent of the world s magnesium production comes from Yulin, and a large chunk of it comes to one place in the province of Shaanxi. About a month ago, the local government ordered roughly 35 of its 50 magnesium smelters to close until the end of the year and told the rest to cut production by 50 per cent to hit energy consumption targets.
To produce one tonne of aluminum requires 35 - 40 megawatt hours of power, replacing magnesium at 16 MHW, according to BoA Securities.
As the metal becomes hard to store – it starts to oxidize after three months — stocks could run critically low before the end of the year if China does not crank up production.
This has been reflected in the prices, with magnesium imported in Europe upping 75 per cent in the last month to a record high above $9,000 a tonne, according to Argus Media, a price assessment company.
In a statement issued earlier this month, WV Metalle, China s non-ferrous metal trade association, called on its government to initiate urgent talks with Germany.
It is expected that the current magnesium reserves in Germany and through Europe will be exhausted in a few weeks at the last of November 2021 at the latest, the statement said. In the event of a supply bottleneck of this magnitude there is the risk of massive production losses. Other industry groups also raise the alarm. Belgian Aluminium, whose members include Norsk Hydro, Rio Tinto and Alcoa, has asked the EU and Chinese governments to immediately work with their domestic counterparts for immediate action. The current supply of magnesium is a clear example of the risk the EU is taking by making its domestic economy dependent on Chinese imports, EA said in a statement. The EU s industrial metals strategy must be strengthened. Magnesium is already included in the EU's list of critical raw materials.
Chinese companies including Norsk Hydro used to produce magnesium but stopped because they could not compete with lower costs of producing at European manufacturers.
He does boast one large domestic producer of metal, US Magnesium, which was offering a degree of protection said CRU Research Manager Stephen Williamson
Aluminium producers North America are also working their scrap supply chains very aggressively to make up whatever raw magnesium they are not able to source. The key question now is whether magnesium production in China will resume by the end of the year? Since aluminium is of great importance to the country manufacturing sector it is reasonable to assume that resumption is imminent. However, this is a risk worth watching carefully, says Barclays Fletcher.
Inventories are currently low across a number of metals. This is especially true for copper, where stocks available on the London Metal Exchange sank last Friday after a surge of orders to the lowest level since 1974. Copper rose 10 per cent last week and reached $10,400 on Monday, not far from the record price of $10,747 in May.
Over the past month, copper not already destined for withdrawal from LME warehouses has dropped to just over 21,000 tonnes from more than 150,000 tonnes. Putting that figure into perspective, about 25 m tonnes of refined copper is consumed annually. In China, copper stocks on the Shanghai futures exchange have fallen to the lowest level since 2009.
For the LME, the world s biggest marketplace for industrial metals, dwindling copper stocks could present a problem because the exchange runs a contract that is settled physically if it is not closed out.
While some metal may make its way into the warehouse system, there might not be any immediate remedy, aside perhaps a global economic slowdown, said Michael Widmer, commodities strategist at BofA Securities.