Chen Fengwei: Magnesium industry suffered greatly in 2014, and market outlook for 2015 is still grim
----Interview with Chen Fengwei, general manager of Shanxi Jiuling Metal Material Co., Ltd.
- Shanxi Jiuling Metal Material Co., Ltd. was founded in 2009 and is located in Yuncheng city, Shanxi province. The company, which prides itself on its extremely professional staff, sells more than 20,000 tonnes of magnesium products every year. The company is customer-oriented, focuses on innovation, and is committed to providing the most professional products and services to global magnesium users.
- Asian Metal: Mr. Chen, thank you for granting us this interview. Could you please give us a brief introduction to Shanxi Jiuling Metal Material Co., Ltd.?
- Chen: Shanxi Jiuling Metal Material Co. is located in Yuncheng city, Shanxi province. It is mainly engaged in magnesium ingots and magnesium powder. Currently, it isn’t involved in the magnesium alloy business.
- The trading volume for magnesium ingots is about 2,000tpm, while the trading volume for high fine magnesium powder (-80 mesh) is 50tpm, taking a big share of the high fine magnesium powder business. In addition, our company co-operates closely with Mei Jia Mei Metal Material Co., which is located in Qingxu county. The magnesium powder production capacity of this company is currently around 500tpm and it will be expanded to 1,000tpm after the Spring Festival; of this, 80% is exported to foreign countries with the remainder being sold to domestic consumers.
- Asian Metal: Magnesium prices continued to hover at low levels during 2014, and even fell to a historic low in the fourth quarter. What do you think is the main reason for the price falling?
- Chen: Firstly, from the macro-environment perspective, the magnesium industry suffered greatly under the dual pressure of the slow recovery of the global economy and the slowdown in domestic economic growth in 2014. The industry’s development was blocked as a result of the contraction in downstream demand. The consumption of magnesium powder and magnesium alloys dropped significantly. For example, the demand for magnesium powder from steel mills fell sharply as steel mills were frequently cutting back or stopping production in 2014 due to overcapacity. Fine magnesium powder is a by-product in the production of magnesium powder (20-80 mesh), and 1 tonne of magnesium powder only contains 4% of fine magnesium powder. Fine magnesium powder is dangerous to store since its mesh is small. The prices for fine magnesium powder were almost the same as those for magnesium ingots as a result of oversupply in previous years. However, demand for magnesium powder declined sharply as steel mills reduced their output dramatically in 2014. Therefore, the output of magnesium powder decreased, and the output of fine magnesium powder fell correspondingly, resulting in a tighter supply. Now the prices for fine magnesium powder are RMB22,000-23,000/t (USD3,531-3,691/t) ex works.
- Secondly, it is worth noting that the magnesium industry has been faced with the problem of a shortage of funds since 2014. In the past factories would reduce shipments when prices dropped to low levels, and they were even able to withstand the pressure of inventories running into thousands of tonnes, which to a certain extent would prevent the prices from falling any further. But since 2014, factories have been unable to hold large inventories and they are willing to negotiate due to a shortage of funds. The market bidding phenomenon has also happened from time to time. Meanwhile, downstream buyers, such as magnesium powder consumers, magnesium alloy consumers, aluminum factories and titanium factories, mainly made hand-to-mouth purchases due to tight budgets, resulting in prices hovering at low levels with no signs of rebounding. In previous years, producers were in no hurry to conclude deals when the New Year was approaching, and they were optimistic about the market outlook after the festival. However, now producers have a strong will to recoup funds and they are willing to make advance sales before the New Year. Furthermore, their confidence in the market outlook after the Spring Festival remains low.
- Asian Metal: Magnesium ingot prices have continued to fall throughout the past year, and producers’ profits have shrunk time and again with some even facing great losses. The situation was also quite difficult for traders, with some even forced to withdraw from the market — yet your company has maintained a stable trade volume. Could you please tell us how your company dealt with these difficulties?
- Chen: As you rightly state, traders suffered a lot this year. The prices for magnesium ingots continued to drop, narrowing traders’ profit margins. Our company’s profit also witnessed a marked fall during this period despite the relatively stable trade volume. There were three reasons which accounted for the stable trade volume. Firstly, as we have mentioned above, producers were faced with a shortage of funds, while downstream consumers not only had difficulty in recouping funds, but also had the problem of extending payment cycles. However, the funds within our company were abundant. Secondly, although our profit margins were repeatedly squeezed, we still tried to occupy a certain market share to ensure our stable trade volume, which would increase our company’s competitiveness. Thirdly, our major consumers were titanium sponge factories. Their demand for magnesium ingot 99.95%min was stable in 2014, which to a large extent ensured the stability of our trade volume. In addition, we have established good relationships with our customers over the years, whose support is also very important to us.
- Asian Metal: Is your company involved in the export business? Can the export ratio be adjusted? At present, the situation within the export market is grim as exporters frequently quote low prices with a view to retaining their market share. What do you think about this situation?
- Chen: At the moment we are not involved in the export business, and our products are mainly sold to domestic consumers. Competition in the export market is intense. The market share of legal traders continues to decline as a result of illegal exports. We have no plans to get involved in the export business at present as our company has no advantage in export bidding and the risk within the export business is too great for us.
- Asian Metal: Shaanxi is the main domestic supply area with more than half of the total domestic output. In the past few years, magnesium enterprises in Shaanxi used raw coal to produce semi coke, and then used the tail gas to produce magnesium metal. This process had an obvious cost advantage. However, in recent years the supply of semi-coke has outstripped demand and the prices of tar fell sharply. As a result, this process became a bottleneck in production. The adjustment of market supply and demand will greatly influence magnesium prices in 2015, so do you think the output in Shaanxi will witness a substantial adjustment? Will the problem of environmental protection become the main factor that affects supply?
- Chen: Shaanxi has become the main magnesium producing area because of its production cost advantages, and the price trend in Shaanxi has become a beacon for the whole of the magnesium industry. Although magnesium prices hovered at low levels in 2014 and producers reported a decline in profits and operating difficulties, the advantage of magnesium plants in Shaanxi is still evident compared with other areas. In my opinion, the supply and demand situation in the region will not change too much, and it is unlikely that producers will cut production spontaneously to support prices. As for the problem of environmental protection, it depends on the policy’s implementation.
- Asian Metal: As you have mentioned, titanium factories are one of your main target customers, and these plants have shown a strong demand for magnesium ingot 99.95%min, the main source of which is Shanxi. Would you please give us a brief analysis of the current supply and demand situation, as well as the outlook for production in Shanxi?
- Chen: We still mainly purchase products from Wenxi county, Shanxi province. Compared with the production technology in Shaanxi, gas producer technology in Shanxi has no energy advantage, and the production cost is also slightly higher. The magnesium factories in Shanxi are mainly involved in magnesium ingots, so they have more freedom without the restrictions of extended production chains and other products. In addition, magnesium factories in Shanxi have advantages in cost control, product quality and operational philosophy. And they also pay more attention to customer service. These factories’ ability to cope with risks and setbacks is relatively good. In view of this, I think magnesium factories in Shanxi will maintain stable production in 2015.
- Asian Metal: As far as we know, your company has a relatively close business relationship with the titanium factories, so can you tell us what the current demand situation is like at these factories? How will demand from the factories change in 2015?
- Chen: Titanium factories are our major customers. And demand from these factories was stable in 2014, which guaranteed the orders we received. I’m still optimistic about the demand from these factories in 2015. As far as I know, the operating rate of titanium sponge factories will be relatively stable throughout, and some factories have expansion plans, so the demand will also be relatively stable. However, because the payment cycle is long and most buyers prefer payment by acceptance, we are also facing capital pressure.
- Asian Metal: What direction do you think the magnesium market will go in during 2015? Take the first half of 2015 as an example; do you think the price and market transactions will be better than in the same period of 2014?
- Chen: I think the market situation will be grim, and it should not be underestimated. The magnesium industry is unlikely to rebound because of the slow economic recovery.
- Asian Metal: Thank you very much for your time, we wish you and your business the best of luck!
- Chen: Thank you!
