Magnesium prices likely to rise further on improving demand in March
----Interview with Chen Xia, Vice General Manager of Fugu Jinwantong Magnesium Co., Ltd.
Founded in 2003, Fugu jinwantong Magnesium Co., Ltd. is located in Gaoshan Semi-coke Industrial Zone, Fugu County, Shaanxi Province. After several years of steady development, the company now has a registered capital of RMB321.8 million and total fixed assets of RMB1.15 billion. At present, the company has 42,000tpy magnesium production line, 600,000tpy semi-coke production line, 2×50MW power plant, 3×31.5MVA ferrosilicon production line, and reduction pot production line with an annual capacity of 20,000 units. With an annual output value of RMB600 million, the company now has more than 1,500 employees, including 8 senior management staff and over 30 mid-level management staff.
Asian Metal: Hello, Ms. Chen, thanks a lot for accepting our interview. Could you please introduce your company’s business briefly?
Chen: Thanks, it’s my pleasure. Our company’s main business includes: (i) 42,000tpy magnesium production line, (ii) 600,000tpy semi-coke production line, (iii) 2×50MW power plant, (iv) 3×31.5MVA ferrosilicon production line, and (v) reduction pot production line with an annual capacity of 20,000 units.
Asian Metal: Magnesium prices in China fluctuated frequently around the Spring Festival in 2017 and insiders were also sensitive to the market trend. In your opinion, what are main causes for this phenomenon?
Chen: Magnesium ingot producers who were in production raised operating rates continuously as profit margins were impressive amid high prices during the fourth quarter of last year. In addition, the magnesium supply increased substantially with more magnesium plants in Inner Mongolia and Xinjiang resuming operation, and as a result the market saw stocks piling up gradually. However, In view of excessive supply and poor demand, producers made an alliance to maintain prices firm, which largely affected the normal trend of the market, resulting in high levels of inventories. Meanwhile, magnesium plants, which were under huge capital and stock pressure, lowered prices to secure orders and recoup funds with the Chinese New Year approaching. In mid-January, 2017, magnesium prices plunged to the bottom level. End users in overseas market started to make purchases for Q1 or even Q2 after learning the sharp price declines, while traders also tried to lower their quotations as low as possible with the aim of securing orders. The irrational price competition also contributed to the frequent price fluctuations. Furthermore, downstream magnesium power, magnesium alloy, aluminum and titanium producers in domestic market made replenishment actively before the end of the year, boosting the magnesium market. Consequently, market transactions in January increased sharply compared with those of last month.
After the Spring Festival, magnesium plants got relief in capital pressure with controllable inventories, but most traders underestimated price rises in February and signed many contracts at low prices, resulting in a noticeable gap between purchasing prices and contract prices. Therefore, buyers changed their pace of procurement frequently, causing magnesium prices to fluctuate repeatedly. Several traders’ speculative mentality and activities, which exerted a great influence on market transactions and mainstream price trend, were the main reason for this round of price fluctuations
Asian Metal: Recently, coal prices rose on tight supply and ferrosilicon producers lifted quotations successively, pushing up the production cost of magnesium ingot. As a result, magnesium ingot prices showed an upward trend. How much do you think the price will rise? And how long will this round of price rise last?
Chen: Coal prices and supply situation have a far-reaching influence on the operation rate and transaction prices of magnesium plants in Shaanxi as they consume as much as 17-20t of coal in producing one ton of magnesium ingot. Most coal plants haven’t resumed production yet and intend to delay restarting operation with the NPC & CPPCC Annual Sessions 2017 approaching. Therefore, magnesium plants in Shaanxi now are under huge pressure caused by higher coal prices and inadequate supply, which is likely to affect their operating rates. What’s more, ferrosilicon producers who were under the stress of price inversion earlier started to raise offers to test the market, leading to higher production cost for magnesium ingot. Therefore, magnesium ingot prices started to advance, but buyers continued to make purchases from hand to mouth and market transactions were tepid.
In my opinion, magnesium ingot prices may move up continuously to RMB14,500-15,000/t (USD2,107-2,180/t) ex works by cash impacted by the rising production cost and difficulty in sourcing raw material. Magnesium plants which are in production can still obtain reasonable profit margins at this price level, while those which remain out of production still can’t be motivated to resume operation. I think magnesium ingot prices will fluctuate in the above range in the first half of 2017.
Asian Metal: How do you think about the market demand at home and abroad currently as well as market transactions in March?
Chen: From the perspective of demand, overall demand at home and abroad is not expected to change remarkably and may be unchanged from that of last year. With downstream magnesium powder, magnesium alloy, titanium and aluminum plants in domestic market resuming normal production and related end users starting to procure raw materials from hand to mouth, domestic consumption volume of magnesium ingot in March is expected to increase compared with that in February. With regard to the export market, overseas end users had already placed orders in January or earlier, and thus the trading volume mainly depends on traders’ execution of orders, but an uptick is also expected to be seen in the transaction volume. On the whole, the market demand is expected to improve in March, providing support for magnesium prices.
Asian Metal: What do you think are the main problems faced by magnesium ingot producers? What are the main advantages of your company in dealing with difficulties?
Chen: As for magnesium ingot plants, major problems in the production process are coal procurement, ferrosilicon price fluctuation as well as environmental protection, all of which have a great impact on magnesium transaction prices.
We own a ferrosilicon plant, which alleviates the influence of ferrosilicon price fluctuations on us; in addition, our coal demand is relatively high and thus we have relatively stable suppliers, so we are not very passive when other plants generally find it hard to source raw coal; third, as a large magnesium ingot producer in Shaanxi, we attach great importance to environmental protection and our plant is well-equipped with desulfurization and denitrification facilities. We also put emphasis on the sewage treatment. This is why the environmental protection administration praised us when it inspected our plant. It is also worth mentioning that quality assurance and good reputation are a strong support for us to overcome difficulties
Asian Metal: In view of the current situation of magnesium market, how is the overall profitability of magnesium plants? How does your company distribute magnesium ingot business between domestic and overseas markets? Do you consider adding magnesium alloy business?
Chen: This question can’t be generalized as magnesium plants have different production and financial costs which are key factors affecting profitability. At present, on account of the current price level, magnesium plants in Shaanxi can still make a small profit.
We seal deals at home and abroad, but we mainly focus on domestic transactions with export business as a supplement. As for the domestic market, we mainly trade with downstream magnesium alloy, anode and bar users, and also do business with some reputable traders. We plan to increase transactions with end users this year and aim for decent profit margins when ensuring steady orders. With regard to the overseas market, we rarely sell directly to foreign customers as a result of fierce competition and long payment time and generally clinch a few deals through reputable exporters.
We plan to bring the magnesium alloy business into our business scope in the future, but have no intention of being engaged in this business this year. Currently, we still focus on expanding our magnesium ingot business.
Asian Metal: Magnesium ingot prices fluctuated sharply in China during Q1 of 2017. How about the market trend in Q2? And how should insiders deal with the market during Q2?
Chen: The second quarter is usually a period when downstream users maintain relatively high levels of operating rates with steady demand, so I’m confident about the market outlook in Q2. Magnesium ingot prices are expected to hover in the range of RMB14,500-15,000/t (USD2,107-2,180/t) ex works by cash. During this period, participants may effectively avoid market risks by responding actively to market movements.
Asian Metal: Thanks so much for your time and we wish your company a bright future.
