Demand recovers slowly, short-term magnesium price will fluctuate around production cost

----Interview with Mr. Huang Guoqiang, VGM of Shanxi Wenxi Yinguang Magnesium Industry Group

Asian Metal: Good morning, Mr. Huang. Thanks for accepting Asian Metal's interview. First of all, let's talk about the hot topic that draws people's attention --- the adjustment of electricity price. National Development and Reform Commission (NDRC) has recently made an adjustment on electricity price. Do you think this adjustment will also have impact on magnesium industry besides the high energy-consuming sectors such as ferrosilicon industry?
Mr. Huang: Price co-fluctuation between coal and electricity has not been implemented for a long time. That electricity enterprises suffering a loss in a prolonged period is an unreasonable phenomenon. Electricity price adjustment is a temporary measure adopted by NDRC in order not to affect the normal operation of the entire industry. After the research by a number of economists, the new policy is introduced at present when they believe that the economy has started to recover, which makes it possible and timely for them to adjust the price. The adjustment will have an impact on all sectors, especially on high energy-consuming industries such as ferrosilicon, but extensive basic materials industries such as magnesium industry will also be influenced. Presently, the difference of process conditions among magnesium producers is not obvious after producers carry out technological transformation and innovations on emission reduction and energy-saving, so the unit consumption of ferrosilicon is almost on the same level. The rising price of ferrosilicon will inevitably lead to higher costs of magnesium ingot. The selling price of magnesium has deviated from producers' normal profit margins. The cost increase resulted from higher ferrosilicon price will be basically transferred to the downstream industries through the price rising of magnesium ingot.
Asian Metal: Can I simply comprehend that the increasing cost caused by the electricity price adjustment will be transferred to magnesium industry by ferrosilicon manufacturers raising offers, and then further to downstream industries by magnesium smelters lifting prices?
Mr. Huang: Yes. As the magnesium producers are running at thin profit margins, they will not shoulder the increased cost.
Asian Metal: If the electricity price increases by RMB0.028/Kwh, the cost of ferrosilicon will rise by about RMB250/t. Plus the increasing cost on higher electricity price itself in magnesium smelting, the production cost of magnesium ingot will increase by RMB300/t in total. However, it seems that consumers can hardly accept the fact that the price increases by RMB300/t from their reaction recently. Most of them are still watching the market. How long do you think it will take for downstream industries to digest the increase?
Mr. Huang: I think the price of ferrosilicon may not increase sharply by one-step after the electricity price goes up, and so does magnesium ingot price. It will take a little longer time for both ferrosilicon and magnesium prices to climb up, but not too long.
Asian Metal: Recently most Shanxi smelters raise their prices by RMB200-300/t to RMB15,800-16,000/t ex works. What's worth noting is in Shaanxi, where high stockpile is seen, the price increase is much smaller than that in Shanxi and Ningxia. Do you think this will have certain constraints to the increase of the overall price level?
Mr. Huang: Yes, it will. Price mainly depends on the supply-demand relationship. On the supply side, enterprises may adjust their profit margin according to their own operation situation. In Fugu, producers make use of the emissions from coke oven to produce magnesium ingot, so the cost is relatively low, which makes rising magnesium prices be subject to the low cost. However, we should notice that it is no longer the time that coke producers can gain high profits, and demand for coke is also affected by the development of steel industry. Will the total amount of China's iron and steel be increasing at high-speed like before? The development of coke will be increasingly restricted by environmental management, and then the cost of coal gas will be calculated to the price of magnesium ingot. Therefore, the production cost of magnesium ingot in Fugu will be measured higher, which will push magnesium metal price to move up moderately.
Asian Metal: Yes, magnesium ingot producers in Shannxi usually did not account the cost of coal gas to the price of magnesium ingot before 2007. However, with the coke industry experiencing ups and downs last year, as well as the management level improving, local producers are paying more attention to the magnesium ingot costing. Speaking of Shaanxi, we know that supported by the rising magnesium price from 2007 to the first half of 2008, many new smelters were established there, leading to a leap on local magnesium capacity. At the same time, we see that in Shanxi, including numerous surrounding magnesium plants near Taiyuan and Wenxi cut or stop production. Do you think the production pattern of magnesium industry has been changed, or when the ultimately new pattern will be formed?
Huang: The pattern change should be permanent. An industry cannot always develop in a very narrow area. Any industry will make relevant adjustments by taking the advantage of different regions. Magnesium producers in Fugu are taking the advantage of low fuel price, but producers in other areas have their own advantages as well. For example, Wenxi is full of dolomite resources and producers there have advanced technology, which can make up differences caused by low-cost in Fugu. However, there is disadvantage in Fugu --- the local dolomite resources are relatively scarce, and it will take a long time for producers there to gain mature technology and upgrade the product quality. Therefore, it is still difficult or inconspicuous to determine a new pattern in a very short period or in several years.
Asian Metal: But even in Shanxi, Ningxia and other areas, producers with no advantages in recourses and technology may be eliminated in the industrial reshuffle. As far as I know, Yinguang Group has begun working on enterprise transformation. Does Yinguang realize that only relying on the extensive magnesium may be difficult to survive in the long run, so the company has already set to the deep-processing of magnesium products?
Huang: Yinguang Group is one of the largest magnesium producers, so to some extent, it has the responsibility to lead and promote the development of magnesium industry. The adjustment of industrial structure is a long-term strategic plan of us. We've been cooperating with a lot of universities, R&D institutions; we assume the state's R&D projects; we have a series of technical conditions and advantages, like national technology center, the primary magnesium experimental laboratory, material experimental materials, application experimental laboratory, etc. Through the development of deep-processing of magnesium, I believe this new material can continuously apply to variety of fields by its unique advantages. Therefore, the development of Yinguang is in line with the development of the magnesium industry. We will continue to use new technologies to enhance magnesium deep-processing products so as to apply to various industries, which can reduce the exports of primary magnesium but increase exports of high value-added and high-tech products. Meantime, we will promote domestic application in order to make contribution to energy-saving and emission-reduction.
Asian Metals: China has been paying more and more attention to energy-saving and emission-reduction in recent years.
Huang: Yes. Large companies should be able to keep up with national thinking and pace to win the support of national policy. Magnesium is a new material, which has many advantages, so the government will definitely value magnesium industry.
Asian Metals: As a environmental-friendly material, applications of magnesium is bound to be expanding constantly. However, the traditional application of magnesium is still concentrated in the steel and automotive industries. Some steel products prices continued rising recently. Do you think this is the performance of economic recovery?
Huang: I think the economic crisis is triggered by financial crisis. The real impact of the economic crisis is far smaller than all of us have seen. Why does demand suddenly disappear? In 2007, the surge of oil prices brings people a wrong signal --- here comes the period that the global economy will develop rapidly. At that time, people were busy investing and expanding production capacity blindly, which promoted an increase in market demand; on the other side, as price increased, dealers and enterprises who were worried about the possible price increase in raw materials replenished stocks in large quantities, which were beyond the normal level. Such behaviors are not out of the real demand, thus creating a false demand increase and forming a bubble, which drove the price of commodities even higher. After the outbreak of the financial crisis, buyers who were out of panic no longer kept normal procurement but only consume inventories purchased before, resulting in the sudden shrink in demand. Seen from the point of view that the demand suddenly disappeared, manufacturers chose to dump materials. However, lower price has not brought about consumption growth. Consumers were all digesting excessive stocks; besides, they also reduced the daily inventory levels, which made economy remain at low levels in a long period. I think the economy is certain to recover, but will not be so strong as in 2007. At present, most people follow the rule that "keep away from the price when the price is dropping". In fact, the economy is in recovery, and the depth of the economic crisis is not actually as serious as we are witnessing, but panic and the way that people clear up stocks convince us that the crisis is too serious. However, when we begin to think calmly, we will find that things are not so severe as we thought and then we become more vigilant and cautious.
Asian Metals: Procurement of raw materials gradually returns to normal. Magnesium ingot market was stable September and October, which also shows that supply and demand is in a state of balance. But we have to admit that overcapacity still exists. Do you think this will blow the magnesium ingot industry once again when the real demand warms up next year?
Huang: I think it will. We should say that not only magnesium industry but also many other sectors expanded unexpectedly fast in 2007. The surplus capacity far exceeds the development of real demand. Magnesium industry is no exception. This phenomenon is likely to result in prices at low levels for a long time. Whenever the price rises, the supply-demand balance will be broken through. If more producers enter the market, leading to a growth in production, producers will have to reduce price again to promote sales. Therefore, the price is likely to swing within a narrow range.
Asian Metal: This means that magnesium price will fluctuate within a narrow range close to the production cost for a long period of time. We find that a number of domestic enterprises hold objective judgments on the market outlook. Moreover, we find that many foreign manufacturers share the same view when we communicate with many major consumers from major markets, such as Japan, South Korea and Europe. However, there are also some people who are pessimistic about the future market, believing that the market may not turn batter until 2011 or even 2012. Of course, such prediction is subjected to the unique environment of local market and the severity of the economic crisis, but we also feel this pessimism are not unreasonable when it is linked to the overcapacity in China. Now let's talk about the export of magnesium products. Yinguang has been in the market for 20 years since it established in 80's and occupies an important seat on magnesium export. Does the economic crisis deals a heavy blow to the export business of Yingguang?
Mr. Huang: It is still needed to emphasize that we cannot talk about Yinguang without mentioning the whole magnesium industry. As a new and environmental-friendly material, magnesium has many unique properties such as light, vibration-absorptive, shielding, etc. Magnesium, with its strong shielding property is precisely to meet the need of the rapid development of cell phones, computers and other electronics industries; its weight is 1/3 lighter than aluminum, which can just adapt to the energy-saving. Energy-saving and emission reduction is a global issue, covering many realms including light rail trains, lighting of cars as well as weapons. Lighting can raise the speed and range of weapons, which may lead to an effect that beyond our expectation. Those properties of magnesium can precisely meet the development of the society, so the application fields will keep expanding. The retreat of magnesium ingot price helps the material to be applied in more fields so as to boost the market demand. Therefore, the outlook of magnesium market is prosperous and it is a sunrise industry. The economic crisis may result in a decrease in demand which will probably keep at a low level for a prolonged period, but the demand is bound to rally and keep strengthening. As the inherent characteristics of magnesium fit the needs of current industrial development, the shrank demand from some sectors will be replaced by that from fields, so I am optimistic about the prospects of magnesium market. Our export business is not affected greatly by the economic crisis. The quality of our products continues to improve on the basis of stability, and we're earning more trust from our customers. We confirmed that some of our customers, who were digesting the more-than-enough stocks purchased before, did decrease their consumption for magnesium, but they are expected to return to the market again before long. Although some customers demand less magnesium, we develop new customers during the reshuffle. Demand from new customers make up the decrease from some old ones and thus our export business is not as bad as expected. Nevertheless, we have to follow the market price to sell the material.
Asian Metal: In recent years the government has introduced some policies on magnesium industry. For example, China imposed export duty on magnesium, and customs introduced export price floor policy to restrain the sharp price decrease in the second half of 2008. Do you think there will be some new policies next year? For example, an increase in export duty, or another round of implementation of the export price floor?
Mr. Huang: I think the government is unlikely to issue new policies on magnesium industry. Many industries in China are export-oriented, which was dealt a heavies blow by the economic crisis. Therefore, I think the government will not take additional measures to discourage exports in the near future. Recently, anti-dumping cases occurred frequently between U.S. and China, because U.S. that aims to protect the interests of domestic enterprises resists the entry of foreign materials. The country should not put any new restrictions on exports.
Asian Metal: Although the country may not take any further measures in the short period of time, it is bound to restrict the industry in the long run as magnesium is one of the high energy consumption, high-pollution and resources consumption industries.
Mr. Huang: Yes. In the long term, the government will continue with various measures to effectively restrict the export of high pollution, high energy consumption and resource consumption products and promote the exports on deep processing products.Yinguang has achieved encouraging results for deep processing. Looking at the market situation in the second half of this year, with the improved technology of our deep-processing products and industry reshuffle, we have made a great progress in both quantity and varieties of deep-processing products. Presently the company owns an annual production capacity of 80,000 tons of primary magnesium, 30,000 tons of magnesium alloy and 10,000 tons of deep-processing products.
Asian Metal: Finally, can you talk about your expectation on the future magnesium industry?
Mr. Huang: I hope that all participants in magnesium industry could rationally set the market price based on the long-term development strategy, and push forward the industry step by step in line with the market demand. Overcapacity cannot be ignored, which will hurt the whole industry. We should do our best to promote the magnesium industrial development complying with the market rules and make full use of the advantages of magnesium in order to make contribution to the whole industrial production.
Asian Metal: I would like to convey your expectations to people in magnesium industry on behalf of Asian Metal in the hope that we can make joint efforts to achieve the goal of the green and healthy development of magnesium industry, and I also hope Yinguang will have a more prosperous future.
Mr. Huang: We would also like to extend our sincere thanks to Asian Metal.