hmm, distilling un-wanted magical items into essence is an interesting idea, but perhaps would deter the dev-team from creating rare weapons that are difficult to find + mediocre weapons that are relatively common to find. Personally I would rather have plenty of hidden magical weapons, with the really good ones being really rare. It would be an advantage to someone that decided to invest valuable resources in dungeon-storming and questing, as opposed to expansion and conquest.

if however, they could all be distilled into essence, wouldn't the potential be too great for exploit if there were plenty of magical weapons lying around (even if most would only give maybe +1 essence when distilled, or have a 50% chance of doing so, or giving none at all)

This makes me think of an interesting post-battle screen for the victors. Including Equipment scavenged, and Prisoners taken.

one of the features supposedly directly inherited from MoM is magic item creation (last I heard anyway) so once SD starts to give us the features surrounding that (I suspect sometime after they give us any magic at all)  we will have a better idea of what we can do with magic items we are not currently using.

I definately like the idea of an item market across empires, or at the very least be able to offer items from your vault on to the bargaining table with other empires.  The only problem is assigning objective values to certain magic items, and having the AI respond to those values intelligently.  It can be done, it's just a matter of whether the dev team has time for it.