October 27, 2021 — As the auto industry continues to manage an ongoing chip shortage, a looming magnesium and silicon shortage is threatening to erode vehicle production even further.

Magnesium and silicon are key ingredients in the production of aluminum alloy, which is used in numerous vehicle parts. Silicon is also a main component in microchips.

The China Problem

The issue is China, which produces approximately 87% of the world’s magnesium supply and about 68% of the world’s silicon.

But that supply has dwindled over the last month as numerous magnesium operations in China’s Shaanxi and Shanxi Provinces have scheduled shutdowns or reduced production by up to 50% through the end of the year.

In September, China’s Yunnan province, the country’s second-largest producer of silicon, announced that it would require silicon plants not to exceed 10% of their August production through December. The 90% reduction will result in an overall 52% decline in silicon production (at least 200,000 metric tons) for the year.

Xinjiang province, China’s largest producer of silicon, had not yet enacted manufacturing cuts as of October 1, but the province is the subject of intense scrutiny from the U.S. due to the human rights abuses of its Uighur population. The U.S. House of Representatives passed a bill in September banning supplies from the area until it was able to prove it had not used forced labor.

While numerous media outlets have blamed China’s growing energy consumption restrictions, the more immediate problem likely is due to a combination of COVID-related shutdowns, several floods, and China’s spat with Australia.

Manufacturing operations across all sectors in China have recently shut down or reduced production to avoid operating at a loss due to rising coal prices over the last several months. Coal prices have jumped in China due to heavy rains that forced numerous mining operations to shut down, along with a nearly yearlong unofficial ban on imported coal from Australia.

This week, China began releasing imported coal from storage to alleviate price pressure, according to a Reuters article. And, according to the China National Coal Assn., coal output has increased gradually over the last three weeks.

And two weeks ago, the State Council of the People’s Republic of China reported that the country’s top economic regulator, the National Development and Reform Commission, had asked major coal-producing provinces to increase production.

Europe & the U.S.

Both the European and North American markets have raised concerns over their magnesium and silicon supplies in the last two weeks.

Several European agencies and industry associations have said that the continent, which procures 95% of its magnesium from China, will exhaust its supply by the end of November. In a joint statement last week, several groups in Europe called it a “supply crisis of unprecedented magnitude,” threatening thousands of businesses across Europe, their entire supply chains, and the millions of jobs that rely on them.

The shortages are driving prices higher. Magnesium prices have jumped from about $2,000 per metric ton to as high as $12,000 in some cases, while aluminum prices are at 13-year highs.

Silicon prices have surged from about $2,600 per metric ton to over $10,000 per metric ton in the last two months.

In the U.S., Alcoa Corp., the nation’s largest producer of aluminum, buys approximately 20,000 metric tons each of magnesium and silicon from China.

During its most recent earnings call, company executives acknowledged that shortages are a concern. Chief Financial Officer William Oplinger said the company is starting to see magnesium suppliers invoke force majeure clauses that relieve them of liability for shipments halted due to natural disasters.

The company says it has been able to pass most of the increased costs to customers and that it is “actively trying to meet our customers’ needs going into 2022.”

Impact on Automakers

The overall impact on automakers is unknown, in part because the shortage is so recent. We expect the guidance from automakers during their earnings calls over the next several days to be intentionally vague as they try to get a handle on what’s in stock and what other suppliers are available.

IHS Markit last month downgraded its light vehicle production forecast by 6.2% (5.02 million vehicles to 75.8 million) in 2021 and by 9.3% (8.45 million vehicles to 82.6 million) in 2022 due to broader disruptions in back-end packaging and testing processes in the semiconductor sector.

But that forecast does not include any disruption from potential magnesium or silicon shortages.

However, General Motors CEO Mary Barra said on the company’s earnings call this morning the magnesium issue does not pose a significant risk to the automaker at this point.

Brian Johnson, Managing Director at Barclays Capital, speculated on CNBC’s Power Lunch five days ago that Ford Motor Co. will be disproportionately exposed to the magnesium shortage because the F-150 pickup truck’s body is mainly aluminum. The average vehicle in North America has about 400 lbs of aluminum while the F-150 has about 900 lbs, Johnson said.

Nevertheless, he said it’s not time to panic, but he will be watching to see whether automakers can line up replacement supplies of magnesium.

There is good news, though. The dire alarms from Europe may be having an effect. According to Shanghai Metals Market, most of the main factories are resuming production. SMM projects magnesium prices to drop from their recent high of over $12,000 per metric ton to about $7,800 per metric ton.

Few Suppliers Outside of China

The challenge is that automakers have few options. In the 1990s, North America was the leading producer of aluminum, accounting for 46% of the world’s supply, followed by the region now known as the Commonwealth of Independent States (CIS) at about 25%, and Western Europe at just below 20%.

Most of the magnesium facilities in the ’90s had converted to a cleaner, albeit more expensive, electrolytic process.

China came on strong in the 2000s using a less environmentally friendly thermal processing, which is significantly less expensive. By the end of the decade, China had forced most suppliers in Europe, North America, and the CIS region out of business.

The US International Trade Commission imposed a five-year anti-dumping duty of 141.49% on Chinese magnesium imports in 2005, effectively saving US Magnesium, the lone surviving magnesium producer in the U.S. The duties are reviewed every five years, with the most recent review concluding last month. The duties have continued uninterrupted since 2005.

US Magnesium, based outside of Salt Lake City, UT, can produce approximately 63,500 metric tons of primary magnesium annually.