Users of rare earth magnets are compelled to pay premium prices for ex China supply

Rahim Suleman has been reaching out to automakers, and other potential customers, for years to sell the rare earth magnets produced by the factory his company is building in Estonia. It's one of only a few outside the dominant producer China.

Suleman's sales pitch was retired after Beijing placed new restrictions on super-strong magnets in wind turbines and electric vehicles, effective April 4. He no longer needed it.

Since China's export controls have tightened up some rare earth exports in the middle of a trade dispute with the U.S. causing chaos in the supply chain and some auto plants to shut down, "the phones are ringing off-the-hook", said Suleman.

Companies opening new plants in Europe and Asia reported earlier that negotiations were difficult because the costs of making magnets outside China are higher. China benefits from lower labour costs, economies of scale, and government assistance via tax rebates.

The crisis has caused many customers to drop their objections to paying these premiums, as they scrambled to strike deals.

Customers are still on edge over the possibility of future shortages, even though rare earth magnets are now flowing again from China.

Neo Performance Materials, Suleman’s company, began producing permanent magnets in its Estonian plant in May. He said that "everyone wants to know how they can satisfy their demand from our facility".

He said he is confident of lining up customers willing to pay a higher price for magnets than they would normally pay. EVs hold 2-4 kg per vehicle.

Neo's factory is producing small quantities of samples for its first customer. Suleman refused to reveal the name of this client. Schaeffler, a German auto parts company, confirmed that it was a client of the factory but refused to say how much they paid.

A company source said that customers in Korea are willing to pay up to 20% more than the price of magnets produced in China for those made in Vietnam. They also expressed a "growing sense of crisis" among their customers.

The company that sells magnets made in China for Samsung phones and tablets is investing $7.39 million in a new plant in Vietnam, due to open early next year, in order to produce magnets with rare earths processed locally by a partner. This person and another official of the company confirmed this.

Less Common Metals in Britain, one of only a few companies outside China that are involved in the rare earths process - producing rare earth alloys and metals - is struggling to keep up with new inquiries.

Grant Smith, the majority owner and Chairman of the company, said: "Now, after April 4, it's as if someone has stuck a cattle prod in to all industry."

He confirmed that LCM had held discussions with a number of companies who use magnets in their search for alternative sources of supply, but he refused to identify them. The company now plans to expand in France and other countries.

Balance is the key

Industry participants say that despite the willingness to pay more, it will still take years, if not decades, to increase production outside China, where 90% of the global supply of permanent magnets comes from.

The question of how much extra should be charged for rare earths or magnets produced outside of China can be tricky.

Analysts and consultants warn that too high a price for rare earths mined could cause consumers to reduce their usage, while too low a price would not allow construction of ex China projects.

According to industry participants, automakers are willing pay a premium to ensure ex-China supply, but are also in a price war for EVs that has left their margins razor thin. They will be uneasy about what they consider to be excessive premiums.

One executive at a rare earths company said their firm has held discussions with automakers that are prepared to pay $80 per kg for neodymium-praseodymium oxide (NdPr), a rare earth needed for magnets used in motors and generators - a figure has not independently verified.

Fastmarkets, a price reporting agency, has reported that the Chinese price is $62.

The executive who refused to be named because he was not authorized to speak with the media said, "The purchasing department has it in its DNA to save every cent or fractional cent. But things are changing."

They're realizing that they lose more money by closing a plant for one month, than if they pay a premium in order to ensure supplies.

Project Blue, a critical minerals consultancy, says that in order to produce enough NdPr to meet the demand, the price per kilogram must be between $75 and $105

Barrenjoey, from Australia, goes even further and says that NdPr should be priced between $120 and $180 per kilogram to finance a significant wave of production which would cover around 20 global mine projects.

A European automaker executive said that his industry couldn't afford to pay high premiums. He said his company had agreed to buy other essential minerals for a premium of 5%-10% if they were certified as sustainable.

He said that his company sells cars worldwide and it could not profit if they had to pay high prices for raw materials that were produced outside China.

BMW and other automakers have created EVs without rare earths while others have reduced their rare earths content in their vehicles. Analysts say that it is not possible to eliminate rare earths in the medium-term.

Neo's Suleman stated that everyone in the industry must work together to ensure a supply outside of China.

He said: "I don’t think we are looking at this as saying that the floodgates have opened, let's charge whatever we like, we need be responsible."

Customers understand that a premium is necessary, but if the premium becomes too large, it could lead to demand destruction.

(source: Reuters)