Drink cans are often manufactured with an alloy of aluminium and magnesium. Photo / File
The world's largest carmakers and other users of aluminium could be forced to halt production within weeks amid a "catastrophic" shortage of magnesium across Europe.
Magnesium is a key material used in the production of aluminium alloys, which are used in everything from car parts to building materials and food packaging.
China has a near-monopoly on global magnesium manufacturing, accounting for 87 per cent of production, but the Chinese government's efforts to reduce domestic power consumption amid rising energy prices have slowed output to a trickle since September 20.
In Shaanxi and Shanxi provinces, the world's main magnesium production hubs, 25 plants had to shut down and five further plants slashed production by 50 per cent as a result of the power cuts.
Europe is expected to run out of magnesium stockpiles by the end of November.
On Friday, a group of European industry associations representing cars, metals, packaging and other sectors issued a joint statement warning of the "catastrophic impact" of the production cuts, which they said had already resulted in an "international supply crisis of unprecedented magnitude".
The statement called for urgent action from the EU Commission and national governments to work with China to stave off the "imminent risk of Europe-wide production shutdowns".
"Without urgent action by the European Union, this issue, if not resolved, threatens thousands of businesses across Europe, their entire supply chains and the millions of jobs that rely on them," the letter said.
European leaders including Germany's Chancellor Angela Merkel have sounded the alarm.
The Financial Times reported that Merkel warned her fellow leaders at their summit in Brussels on Thursday about the potential crisis unless China restarts its magnesium smelters.
Diplomats told the paper her concerns were echoed by Prime Minister Andrej Babis of the Czech Republic, which also has a large auto industry.
"We are raising this issue with our Chinese counterparts in order to address immediate shortages and are assessing long-term solutions to tackle this strategic dependency," the European Commission said in a statement.
Car manufacturers have already been hit with delays this year due to a shortage of semiconductors, but the focus is now shifting to magnesium.
"A magnesium shortage could trigger a shortage of [usable] aluminium, which in turn could also hit car production," BofA Securities analysts told clients last week, according to the Financial Times. "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."
In their letter on Friday, the industry groups warned that with the EU almost totally dependent on China for 95 per cent of its magnesium, "the European aluminium, iron and steel producing and using industries together with their raw materials suppliers are particularly impacted, with far-reaching ramifications on entire European Union value chains, including key end-use sectors such as automotive, construction and packaging".
They noted that the current supply issues had already resulted in record prices and worldwide distortions in the supply chain.
The cost of magnesium has skyrocketed, with today's remaining imports trading at what they described as "extortionate prices" of around $US10,000 to $US14,000 ($A13,350 to $A18,700) per metric ton, up from around $US2000 ($A2670) earlier this year, "making it almost impossible for European companies to produce or source magnesium-containing materials at a viable level".
The letter was signed by ACEA, the industry body that represents BMW, Volkswagen and other global carmakers, as well European Aluminium and Eurofer, the steel lobby group.
"Our industries jointly call on the EU Commission and national governments to urgently work towards immediate actions with their Chinese counter-parties to mitigate the short-term, critical shortage issue as well as the longer-term supply effects on European industries," the letter said.
Canada-based aluminium producer Matalco recently wrote to its customers and business partners warning of potential shortages due to the magnesium crisis.
"In the last several weeks, magnesium availability has dried up, and we have not been able to purchase our required magnesium units for all of 2022," Matalco president Tom Horter wrote in the October 13 letter, according to a report from research firm S&P Global Platts.
"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."
Mr Horter promised another update within weeks but warned "in the meantime, you may want to consider letting your customer base know of this silicon and magnesium availability crisis and also let them know that other products or inputs needed for making billet or slab may also reach a crisis point".
"These 'hardeners' for our products are essential as we cannot produce products without them," he said.
According to a September 27 report by European Aluminium – an industry group which includes the likes of Alcoa and Rio Tinto – Europe has been hit especially hard by the shortages as it takes around 45 per cent of all Chinese magnesium exports.
The report warned that the current crisis was a "clear example of the risk the EU is taking by making its domestic economy dependent on Chinese imports".
Europe has grown almost entirely dependent on China for magnesium since Chinese dumping forced the closure of Europe's remaining magnesium production plant in 2001.
"Between 2000 and 2021, China's magnesium production increased from 12 per cent of the global supply to 87 per cent, creating an effective international monopoly on a 1.2 million tonnes per annum market demand," European Aluminium's report said.
"The magnesium sector is only one in a long list of production leakages since the early 1990s.
"European primary aluminium production alone has lost more than 30 per cent of its capacity since 2008. In parallel, China continuously increased production capacity to meet the steady increase in European and global demand for both aluminium and magnesium."
European manufacturers now face "dramatic risks" as China is expected to direct its remaining magnesium production to its own industries, with European companies no longer receiving the necessary raw materials to continue production.
"Under these circumstances, European Aluminium cannot preclude further plant closures," the report said.
On Sunday, China's state-run Global Times outlet warned magnesium exports were likely to drop by 10 per cent in 2021.
The Global Times said while some magnesium smelters had resumed production at 40 per cent output, industry insiders expected market uncertainty and volatility to persist until the end of the year.
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