After chips, manufacturers face the next supply chain threat as magnesium stocks run out

The good news is the worst of the global chip shortage seems to be behind the auto industry.

Carmakers from Ford to Mercedes-Benz and Volkswagen have all indicated that the supply hiccups that were caused by recent COVID-related stoppages in Malaysian chip packaging plants appear to be easing in the fourth quarter.

The bad news is the next shortage of a key raw material could already be on its way.

Manufacturers are keeping a close eye on production levels of magnesium coming out of China, where a lack of power has led to rolling blackouts that hobble supply from energy-intensive smelters. Annual demand for the strong, lightweight material weighs in at 1.2 million metric tons, and it is found in many aluminum alloys to reduce the weight of car components ranging from body parts to engine blocks and wheel rims.

Volkswagen Group purchasing manager Murat Aksel told analysts on Thursday that his team was already taking countermeasures in the likely event that the supply becomes tighter.

“We cannot forecast right now if the shortage in magnesium and aluminum, which will happen definitely according to planning, will be bigger than the semiconductor shortage,” he said during a conference call.

Magnesium production dropped sharply in September, with analysts from Bank of America pointing in particular to smelters in coal-rich Inner Mongolia that were forced to shut down. Today’s remaining magnesium imports are trading at prices of about $10,000 to $14,000 per metric ton, up from just around $2,000 earlier this year.

Europe, the most exposed region, with 95% of supply sourced from China, is currently expected to deplete its magnesium stocks by the end of November, according to the investment bank.

“If aluminum producers ran out of magnesium, this would quickly feed through downstream, further exacerbating supply-chain issues,” they wrote.

“Crisis of unprecedented magnitude”

No less than a dozen different European lobby groups, including those representing the interests of vehicle manufacturers and component suppliers, warned of an “international supply crisis of unprecedented magnitude” in a statement.

“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,” they wrote.

Despite the manufacturing industry’s impassioned plea for help, individual corporations have avoided sounding so desperate. Executives at BMW, which navigated the chip crisis better than most, even dismissed the concerns over magnesium and alloyed aluminum outright this week.

Mercedes-Benz finance chief Harald Wilhelm told reporters on Friday the carmaker was evaluating the risk to its supply chain and examining whether to divert purchases to materials with reduced magnesium content or none at all.

“To my understanding this is due to power shutdowns in certain Chinese provinces that need to reach CO2 targets,” he said. “I don’t want to sound naive and overly optimistic, but in our view there’s no structural problem (as is the case with semiconductor chips), nor do we see the threat that China no longer intends to supply the world with magnesium.”

Stellantis, the Franco-American carmaker that emerged from PSA Group’s acquisition of Fiat Chrysler, doesn’t expect its inventories of magnesium-alloyed aluminum will run out soon.

“In the short term we’re not seeing any issues. The sourcing of aluminum is relatively localized in our major markets,” finance chief Richard Palmer told analysts on Thursday. “Unfortunately China is not a major market for us at this stage. If the issues there start to [spread to] other markets in the medium term, we’ll see. But we’re not seeing anything at the moment.”

Carmakers are not the only ones exposed. The shortage could also affect another key transport industry that requires lots of lightweight materials: aerospace manufacturing.

For now, Airbus CEO Guillaume Faury told analysts that there have not been any significant disruption to his operations.

“I know it’s on the radar of our teams,” he said.