(This is an executive summary. The full report is available on AutoTechInsight. See links below.)
As the automotive sector struggles to sustain production in light of the semiconductor shortage, new concerns emerge about the stability of the supply of magnesium, which is critical to aluminum production and largely comes from mainland China. The price of the raw material recorded a threefold increase from pre-pandemic levels, further corroborating fears of shortages in the sector.
The issue was raised at the government level at a recent EU Council held a week ago as it could have “far-reaching ramifications on entire EU value chains”. There is no doubt that prolonged magnesium deficiency could have a devastating impact on vehicle and component manufacturing. This article looks at why this has become a problem and whether it will impact vehicle and component manufacturing.
Magnesium in the automotive sector
Magnesium is considered the lightest material among all those commonly used for structural applications. It is about a third lighter than aluminum. It also has the property of easily binding with other elements, which makes it difficult to find magnesium in its pure form. Automotive applications of magnesium began with racing cars, adopting the material in some components as early as the 1920s. The adoption of the material in light vehicles began with commercial vehicles.
Most of this material is produced from natural minerals such as dolomite and magnesite and is typically mined through two processes, both of which require high levels of energy and produce high levels of emissions: pidgeon process and electrolysis process (mainly used in the United States) , one starting respectively from the mineral dolomite, the latter from magnesium chloride.
It should be noted that the vast majority of automotive applications come from alloys where magnesium is present with varying levels, mainly aluminum alloys. The following aluminum series commonly used in automotive components are affected by the use of magnesium or silicon (and therefore by potential deficiencies): 5xxx, 6xxx, 7xxx and 3xx.x.
Aluminum alloys are highly recycled within the automotive value chain, so special attention should be paid to increasing market demand for machined alloys, which burdens the supply chain for minerals with additional raw materials. For the automotive value chain, a large amount of demand for machined alloys comes from aluminum foil used in body construction.
Is there a shortage?
The origins of the concerns are to be found in mainland China, which in 2020 represented 85% of the global production of metallic magnesium, in particular in the province of Shaanxi, which represented 63.5% of the total production with its 0.61. million tons. . Magnesium producers in Shaanxi province have to contend with high coal and electricity prices and stricter “double control” of energy consumption.
To further reduce 2% of energy consumption in GDP growth per capita in the third quarter and 3.2% in the full year 2021, the city of Yulin in Shaanxi has urged industrial plants, including magnesium plants, which are classified as high-emission units, ao completely shut down or operate at 50% of production capacity in the last two weeks of the third quarter. Most magnesium plants have resumed operations since the beginning of October, but are being asked to operate at around 40% capacity until the end of this calendar year.
This has raised concerns, particularly in the automotive industry, over an impending shortage of material. John Mothersole, IHS Markit’s chief financial officer in Price and Purchasing, made it clear that there is no certainty about the impending shortage, but markets are reacting to the scale of production cuts in mainland China and the relatively low inventories coming in the fall. “The fear that if this lasts for a few months it will result in a shortage of material is well placed,” explained Mothersole.
There are indications that the mandatory production cuts imposed in China may soon be eased, perhaps as early as November. The Chinese authorities intervened in both the coal and electricity markets in an attempt to alleviate the crisis. If the electricity supply starts to improve, mandatory production cuts are likely to be eased.
To date, no aluminum deficiencies have been reported.
Possible long-term implications
The current energy market within Shaanxi province and the guidance provided by Yulin city officials are the determining factor for both the short and long term direction of the magnesium market. The duration of the production limits, constrained by the energy demand of the grid at the provincial level, will become a key metric to monitor in order to understand the prices and availability of magnesium supply. Most of the plants within this province will operate at 40% of production capacity until the end of 2021.
In addition to the immediate next quarter of magnesium production, investments in energy capacity within Shaanxi province, easing of energy cuts or changes in the priority of energy restrictions will set the direction of the market for both magnesium availability and the basis of production costs. While policy eases may alleviate the supply chain bottleneck for this material, the energy-intensive nature of magnesium production will not be affected in the medium to long term. Substantial research and development is required for any material production to reduce energy needs. Beyond that, there is no clear path to adjust to the fact that Shaanxi Province is responsible for producing nearly 54% of the global magnesium supply.
In the worst case, extensive production cuts will inevitably lead to a shortage of material, as capacity outside Greater China will not be able to make up for the global supply shortage. In this situation, we could see a cascading effect on the aluminum sector, even though aluminum prices seem stable so far. IHS Markit, to date, has no confirmation as to what is happening, nor that aluminum producers are concerned about this magnesium situation.
The auto industry remains concerned about this situation, with the immediate impact of substantial increases in input costs as a disturbing sign that the shortage is imminent. The next couple of months will be crucial to understanding whether this translates into a similar path to what has been observed with the semiconductor shortage or whether it is an overreaction in the metals market. Meanwhile, long-term supply risks should also be the focus.
A recent study by the US Department of Defense identified magnesium as one of the country’s key strategic minerals. Such over-reliance on China may not bode well in the context of the economic decoupling the US is pursuing or Europe’s policy of “strategic autonomy”. In this context, it would be wise for OEMs and suppliers to explore some pathways to alleviate their exposure to high-intensity magnesium alloys in the long run.