Hydro Magnesium full speed ahead in China

(May 30, 2001) "We are the world's No. 1 magnesium producer. To continue and expand upon our leading position, we need additional metal production units. China represents the cheapest metal source. We'll benefit from that if we can combine the Chinese source with our market position," says Keith Jones, vice president of operations, Norsk Hydro Magnesium.

Xi'an is at the door-step of the western provinces of China. The city plays an important role in developing the region due to its location and its major universities. Its industrial parks draw a number of large projects. One park attracts mainly high technology companies and their production plants, which support the Chinese Space Programme in Xi'an. Companies like Rolls Royce, which has a joint venture company manufacturing jet engines, call Xi'an home. The provincial government aspires to develop the area into the "Silicon Valley" of China.

Turnaround
From a net importer of magnesium in 1993, China has rapidly developed into the world's foremost magnesium producer. Today, the country exports 130,000 tones of magnesium, which accounts for 30 percent of the world's consumption. One of the reasons for China's speedy growth is its ability to lead the way in price reduction.

"China's low labour cost has made it possible for them to apply an inefficient magnesium production process which is not used in the west. Hence, they can afford to build and operate their plants at marginal cost," explains Jones.

"At present, China has five or six major domestic players who control 60 percent of the market. These include Ningxia Magnesium, Yiwei Tongbao, Dongfang and Tongiang."

Initial work
"In 1998/99 Hydro showed interest in the possibility of doing magnesium business here. I was given the task to survey the market. I visited 15 Chinese magnesium plants in the Shaanxi, Henan and Ningxia provinces, which together make up 60 percent of China's magnesium production," says Chen Derong, chief representative of Norsk Hydro Beijing Representative Office.

"The wholly-owned concept comes rather naturally, for unless we can find a prominent local partner who already dominates a huge market share, there's no reason not to do it on our own. Utilization of own technology is another major reason to make this a wholly-owned Hydro plant."

"The Chinese government's 'Go West' policy, which attempts to attract foreign direct investment to the western provinces, has made it much easier for us to work within the state's Special Economic Zone. We are ready on the right track at the right time."

Chen Derong points out that one of the main reasons most of the magnesium plants are in the northern part of China is proximity to raw materials. "All the required raw materials, like dolomite, ferro-silicon and coal, are nearby." Another reason is the dry weather suitable for production.

First greenfield plant
The new magnesium plant in Xi'an not only marks the beginning of a new chapter for Hydro Magnesium, it sets a new milestone for Hydro as the company's first greenfield and wholly-owned plant in China.

The initial development of the plant includes construction of a magnesium alloy production foundry and anode production. The estimated production capacity from phase one is between 4,500 to 6,000 tons of magnesium alloys combined with 400 tons of magnesium anodes per year.

Buy local
The plant building is a cost-effective light steel structure with a traditional Hydro architectural style in blue and grey. The steel structure is pre-fabricated in Shanghai, while the wall panels are imported from Korea.

About 95 percent of the value of all contracts and purchases goes to local Chinese or joint venture companies.

"Although we have not worked with these contractors and suppliers before, by applying our specifications and our inspection program together with our experience, we are confident that we will meet the overall quality targets," explains project manager Joar Bergset.

Teamwork
Jones says that cultural differences have not erected barriers. "China and Norway have enormous cultural differences," he says. "We are so unlike in our thinking, expectations and values. Nevertheless, our differences have not hindered our cohesion and commitment as a team. Our colleagues from Beijing, particularly Chen Derong, have been very helpful in bridging the gap.

"This country is changing at an unbelievable pace. Infrastructure is put in place at a fraction of the time needed in any other known project or existing operation outside the People's Republic of China. There is a lot to be gained from this experience."

Bergset agrees: "I experienced excellent support and close cooperation with colleagues from China and Singapore. Their skills, experience and knowledge in project work, and the way they work with authorities, contractors and suppliers, are impressive. To have access to such Hydro competence in the Hydro Asia area really makes a difference in a project like this one.

"China is such a huge country, and even our Chinese colleagues sometimes encounter new experiences dealing with the local Xi'an authorities and contractors. This just demonstrates that there is a vast gap in mentality and business principles between the coastal and inland areas, like Xi'an, and that the 'opening up policy' has not yet reached everywhere."

The entire project team is international. The members include Guo Xingping, deputy project manager, from Beijing; Chan Wei Siong, senior project engineer, from Singapore; and Per Kristian Andersen, senior project engineer, responsible for technology and training. Zong Song Shuai, Xi'an, and Chen Derong, Beijing, mainly support the project on cost control and legal issues, respectively. The picture is not complete unless engineering support from Hydro Technology and Projects and operational support from Hydro in Porsgrunn and Bottrop is mentioned.

Challenges ahead
The magnesium plant is the first foreign wholly-owned company in the "Xian Economic and Technology Development Zone." Despite the local authorities' support and welcoming attitude towards foreign investment, Hydro's status comes with its own unique brand of challenges, for it is setting precedents in every possible way.

One of the challenges is communication. All Hydro documents are in English, while the local authorities require everything in Chinese.

"Most of the contractors we engage are ranked as national contractors, which means they are large companies with a long list of Chinese and international reference projects," says Bergset. "However, their branch offices may vary in quality and experience. Besides, here, as everywhere else, the quality of people handling the contract is absolutely crucial.

"Close supervision is even more critical here due to the language challenge. As our contract is in English and has to be translated into Chinese, we have to take extra care to ensure the contractors understand the content correctly. Also, in the daily communication, we need to be cautious getting to the real meaning of the conversation, an issue I leave to my Chinese colleagues!"

"In addition, the former landowners, who are farmers-turned-contractors, have approached us for small jobs even if those are within the job scope of our contractor. Through some flexibility and several negotiations we have prevented these events from causing any major disturbance to our work progress. These 'farmers' have supplied equipment and personnel to the final part of the site preparation work."

Technology transfer
Bergset points out that the "initial training of key employees will take place at Hydro's magnesium plants in Bottrop, Germany and Porsgrunn, Norway. More training support will be held in Xi'an after construction is completed, and during the start-up and regular operation. We have planned for Western operational support until the local staff are adequately trained."

"It is absolutely important for us to seek quality approval from our customers worldwide. After we gain their support, our product from the Xi'an plant will become part of Hydro Magnesium's metal sourcing system. Today, this system includes our primary and recycling plants in Norway and Canada and our recycling plant in Germany," says Jones.

Health, environment and safety
"The implementation of Health, Environment and Safety (HES) is related to plant design and operational training and is part of a natural and normal work process in a project like this one," says Bergset.

"Our design standards meet the overall Hydro requirements and we will execute the necessary training with follow-up programs to ensure everything falls in place. We are certain that our strict HES standards will be observed here and are on par with our standard internationally."