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China's export controls disrupt rare earth magnet supply

chains

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Automakers willing to pay premiums amid supply risks

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Building ex-China production will take years

By Eric Onstad and Hyunjoo Jin

LONDON/SEOUL, July 1 (Reuters) - For years, Rahim

Suleman had reached out repeatedly to automakers and other

potential clients to market the rare earth magnets from the

plant his company was building in Estonia, one of just a handful

outside dominant producer China.

But after April 4, when Beijing imposed new restrictions on

the super-strong magnets used in electric vehicles and wind

turbines, Suleman retired his sales pitch. He didn't need it any

more.

Ever since China's export controls tightened some rare earth

exports to a trickle in the midst of a trade war with the U.S.,

causing chaos in supply chains and some auto plant shutdowns,

"the phone is ringing off the hook", said Suleman.

Companies starting new plants in Europe, the U.S. and Asia

had previously reported difficult talks on deals that embedded

the higher costs to make magnets outside China, which benefits

from cheaper labour costs and economies of scale as well as

government support via tax refunds.

But the crisis has led many customers to soften or drop

objections about paying those premiums as they scramble to

hammer out deals, according to a dozen industry participants

including automakers, magnet makers, rare earth producers,

consultants and government officials interviewed by Reuters.

While rare earths magnets from China are beginning to flow

again, customers remain on edge about the threat of future

shortages.

Suleman's company, Neo Performance Materials ( NOPMF ),

launched output of permanent magnets at its Estonia plant in

May. Now, he said, "everybody wants to talk about how (they can)

satisfy their demand out of our facility".

He said he has no worries about lining up enough customers

who will pay a premium - $10 to $30 per kg, with EVs typically

holding 2-4 kg of magnets per vehicle - over the price they

usually pay for Chinese magnets.

Output at Neo's factory in Estonia is starting small,

providing samples to its first customer, which Suleman declined

to identify. German auto parts supplier Schaeffler

told Reuters it is a customer of the plant, but declined to

comment on how much it is paying.

In Korea, customers of NovaTech, which produces

magnets in China, are prepared to pay 15% to 20% more for

magnets made in Vietnam, a company source told Reuters, adding

there was "a growing sense of crisis among customers".

The company, which sells China-made magnets used in

Samsung's phones and tablets, is investing at least 10 billion

won ($7.39 million) in a plant in Vietnam launching early next

year to make magnets using locally processed rare earths from a

partner, the person and another company official told Reuters.

Britain's Less Common Metals, one of the few firms outside

China involved in a key step of rare earths processing - making

rare earth metals and alloys - says it is battling to cope with

new enquiries.

"Now, post-April 4, it's like someone stuck a cattle prod

into the whole industry," said Grant Smith, its majority owner

and chairman.

He said LCM has held discussions with numerous companies

that use magnets as they seek alternative supply sources, though

he declined to name them. The firm now has plans to expand into

France and other countries.

A FINE BALANCE

Despite the new willingness to pay a premium, it will take

many years or even decades to build up production outside of

China, which accounts for 90% of global permanent magnet supply,

industry participants said.

And the question of how much more should be paid for rare

earths and magnets outside of China is a tricky one.

Too high a premium for mined rare earths could see consumers

cutting down their use, while premiums that are too low would

not be enough to allow for construction of ex-China projects,

analysts and consultants say.

Automakers are willing to pay more to guarantee ex-China

supplies, but they are also in the midst of an EV price war that

has left them with razor-thin margins, and will still be queasy

at what they regard as excessive premiums, according to industry

participants.

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

Reuters has not independently verified.

That is already a significant - near 30% - premium over the

Chinese price of $62 based on data from price reporting agency

Fastmarkets.

"The purchasing departments have it in their DNA to save

each cent or fraction of a cent, but things are changing," said

the executive, who declined to be identified because he is not

authorised to speak to the media.

"They're realising they're losing more by having to close a

plant for a month than paying a premium to guarantee supplies."

Critical minerals consultancy Project Blue says that for

NdPr, a price of $75 to $105 per kg is needed to support enough

production to meet demand.

Australia's Barrenjoey goes further, saying NdPr prices need

to be $120 to $180 per kg to fund a substantial wave of

production that would encompass around 20 global mining

projects.

One executive at a European automaker said his industry

could not afford to pay excessive premiums. His company has

agreed deals for other critical minerals at a 5% to 10% premium,

based on certification they are produced sustainably, he said.

His company sold cars globally, he said, and could not make

a profit if it had to pay a high premium for all the raw

materials produced outside of China.

Some automakers, such as BMW, have developed EVs

that do not use rare earths, while others have reduced the

amount of rare earths in their vehicles. However, getting rid of

rare earths is not feasible in the medium term, analysts say.

Neo's Suleman said everyone in the industry had to work

together to create a supply of rare earths outside China.

"I don't think that we're looking at this and saying the

floodgates are open, let's just charge whatever we want, we need

to be responsible," he said.

"Customers understand there is a premium that is required,

but if that premium gets too big, we're looking at demand

destruction."

($1 = 1,353.6800 won)

(Additional reporting by Melanie Burton in Melbourne; Editing

by Veronica Brown and Jan Harvey)