China's Magnesium Shortage Could Spell More Trouble For Global Car Industry 

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by Tyler Durden
Wednesday, Oct 20, 2021 - 01:05 AM

While a shortage of semiconductors has plagued the global auto automotive industry this year, the market is now turning its focus to magnesium, a hardening agent of aluminum. Such a shortage could paralyze the aluminum billet production used to make engine blocks, gearboxes, frames, body panels, and rims, among other critical items for automobiles in Europe and the Americas. 

 "A magnesium shortage could trigger a shortage of aluminum, which in turn could also hit car production.

"We stress at this point that such a scenario is not yet included in our estimates. The issue has just emerged and no carmaker has yet warned about it," BofA Securities analyst told clients in a note. 

The source of the shortage is China's monopoly on global magnesium production. Production curbs of energy-intensive smelters have reduced the industrial metal's output, resulting in dwindling stockpiles in Europe and North America. 

Barclays analyst Amos Fletcher told clients in a note that "there are no substitutes for magnesium in aluminum sheet and billet production." He warned if "magnesium supply stops," the entire auto industry will grind to a halt. 

The latest warning of magnesium shortages materializing was last week's warning from S&P Global Platts who obtained a letter from Matalco Inc. President Tom Horter warning customers, "in the last few weeks, magnesium availability has dried up, and we have not been able to purchase our required magnesium units for all of 2022." 

Matalco is North America's largest producer of aluminum billet. Horter's warning continued: 

"The purpose of this note is to provide this advanced warning that, if the scarcity continues, and especially if it becomes worse, Matalco may need to curtail production in 2022, resulting in allocations to our customers." 

For a stunning wake-up call to just how concentrated the complex global supply chain is, 85% of the world's magnesium production comes from China. Much of it comes from one town in Shaanxi province, Yulin, where the government has curbed output at 70% of all magnesium smelters this year due to energy conservation ahead of the Northern Hemisphere winter. 

European industry groups have sounded the alarm. WV Metalle, Germany's non-ferrous metal trade association, warned:

"It is expected that the current magnesium reserves in Germany and throughout Europe will be exhausted in a few weeks at the end of November 2021 at the latest," the group said. "In the event of a supply bottleneck of this magnitude, there is a risk of massive production losses."

European Aluminium, whose members include Norsk Hydro, Rio Tinto, and Alcoa, said, "the current magnesium supply shortage is a clear example of the risk the EU is taking by making its domestic economy dependent on Chinese imports. The EU's industrial metals strategy must be strengthened." 

Aluminum futures on the London Metal Exchange have broken out to a new high as concerns of magnesium supply mount. 

The critical question is if Beijing will allow magnesium smelters to restart operations by the end of the year or early next year to replenish supplies. If that's not the case, expect the automotive industry to be dealing with a twin crisis of not just a lack of semiconductors but also crucial aluminum.