From the US to Europe, there is growing awareness that an over-reliance on China for rare earths presents economic and national security risks. One high-stakes arena that could shape the trajectory of the global climate economy is the rare earth permanent magnet industry.
There are four major types of permanent magnets: two that have no rare earths in them, and two that do. Rare earths are a group of 17 metals, classified into lights and heavies depending on their atomic number, and are crucial to the manufacturing of high-tech products.
The first rare earth magnet to have been developed was based on the rare earth samarium and the transition metal cobalt. Known as the samarium-cobalt (SmCo) magnet, it was developed in the 1960s in the US and was far more powerful than previous permanent magnets. It also sparked a revival in magnets research. By the 1980s, researchers at Japan and the US separately developed a cheaper and stronger rare earth magnet: the neodymium-iron-boron (NdFeB) magnet. Today, the NdFeB magnet accounts for the majority of global rare earth permanent magnet production.
A typical NdFeB magnet contains about one-third neodymium, a light rare earth. Some of that neodymium can be replaced by another light rare earth, praseodymium (Pr). As such, NdFeB magnets are also referred to as NdPr magnets.
Powerful permanent magnets made of rare earth materials are critical components of climate economy products such as electric vehicles and wind turbines, as well as other technology like phones, refrigerators, and missiles and jets. They form an important part of the global rare earth supply chain, turning the processed minerals into inputs that are valuable for electronics and weapons manufacturers.
China is by far the world’s top producer of these magnets, responsible for 87% of global production in 2018, according to Ping An Securities. The remainder are mostly produced by Japan, which sources most of its neodymium and praseodymium from the Australian rare earth giant Lynas, the world’s largest miner and processor of rare earths outside of China.
Beijing’s dominance in the production of such a critical input has significant geopolitical implications. As MP Materials, which operates the only active rare earths mine in the US put it, “NdPr magnets are a single point of failure for national security, the economy and the environment.”
Thanks to NdFeB magnets’ high magnetic strength, they are able to produce a lot of energy relative to their weight and size. That makes them ideal for products that require a high energy-to-weight ratio, like electric vehicle motors. A big, heavy magnet would cost more energy to move around, hindering the vehicle’s range. Tesla, for example, has used NdFeB magnets in its motors.
The magnets are also used in wind turbines. NdFeB magnets containing the heavy rare earth dysprosium and sometimes terbium are particularly useful, because the presence of heavy rare earths improves the magnet’s ability to withstand high temperatures. The higher durability means lower maintenance costs, which can rapidly add up for offshore wind farms.
Analysts have forecast a doubling in demand for NdFeB magnets within the decade as the world increasingly shifts towards electric vehicles and low-carbon energy.
China exerts considerable dominance over much of the global rare earths supply chain. It produces over 60% of the world’s rare earth, and has parlayed its grip on global supplies into dominance further down the industrial chain—including the production of rare earth magnets.
“China utilized rare earths to take over the magnet industry,” MP Materials CEO James Litinsky told Argus Media last year. “They could do this because there has been no rare earth supply chain in the western hemisphere for many years. China will continue to move downstream to compete for greater commercial share.”
Meanwhile, Beijing is working to reinforce its rare earths dominance by shoring up regulation of the full industrial chain. Still, while China produces the bulk of the world’s rare earth magnets, some Chinese researchers have pointed out that the country continues to be out-competed (link in Chinese) on the most advanced, highest value-added rare earth products.
Over the past decade, more and more producers of rare earth permanent magnets have moved their manufacturing capacities to China, in large part drawn by the proximity to raw material supplies. After China slapped a rare earth embargo on Japan in 2010 over a diplomatic dispute, some Japanese magnet manufacturers also considered diversifying and shifting production capacity to China as a way to mitigate unexpected supply chain risks. For example, Hitachi Metals, the world’s leading magnet maker, in 2016 announced a joint venture (link in Chinese) with a major Chinese magnet maker Zhong Ke San Huan, explaining that the move was “necessary to achieve global growth” in its magnet business.
China also presents the benefit of lower costs. It’s about 20% cheaper to produce a rare earth magnet in China than in Europe, according to Nabeel Mancheri, secretary-general of the Brussels-based Rare Earth Industry Association, thanks to lower labor and energy costs. But as the Chinese government tightens environmental and land-use rules, production costs will go up and Mancheri expects it’ll cost the same to produce a rare earth magnet in China and Europe within 15 years.
For China, its dominance in rare earth magnets brings strategic advantages. Even amid the US-China trade war, US imports of rare earth magnets from China in 2019 increased 12% compared to the year prior. According to Ping An Securities, the US also never placed tariffs on Chinese imports of rare earth magnets, even as it slapped levies on items from bicycles to Bibles. “It can be said that the rare earth permanent magnet industry is one of the few industries in China that has an important position in international competition and has global competitiveness,” wrote the Ping An Securities analysts.
Chinese rare earth magnet makers also enjoy another competitive advantage: favorable tax regulations. According to Ginger International Trade and Investment, a Singapore-based firm focused on rare earth supply chain management, all rare earth oxides, metals, and magnet prices include a 13% value-added tax. If a firm exports rare earths from China, they are not given a VAT refund. However, there is a full refund of the VAT upon export of rare earth magnets. This means that “China’s NdFeB producers have a 13% raw material cost advantage over foreign NdFeB makers,” according to Ginger International.
So far, an area in which China has yet to dominate is intellectual property. The Japanese company Hitachi Metals is the world’s top magnet makers, and holds over 600 individual patents for NdFeB magnets. The expiry in 2014 of one of Hitachi’s core NdFeB patents was seen as a boon to Chinese magnet makers. JL Mag Rare Earth, one of China’s top magnet manufacturers, told investors on a call (link in Chinese) last November that Hitachi patents can no longer restrict Chinese magnet firms from competing globally.
That may be too optimistic of an assessment.
“It’s not a single patent” that matters, said Mancheri, of the Rare Earth Industry Association, referring to the 2014 patent expiry.
The REIA’s president, Dr. Badrinath Veluri, added that the patent regime for rare earth-based magnets is enormously complex. “Today, there are major Chinese magnet manufacturers aiming to produce the high end and high quality rare earth-based permanent magnets using advanced manufacturing techniques covered by their own patents or licensed from others. Regarding the patents and IP-related aspects, every manufacturer and buyer do their self-assessments from time to time.”
Still, Chinese academics have also pointed out that China’s rare earth magnets industry risks being stymied by Japan, which continues to hold the bulk of the most valuable permanent magnet patents and has set up cross-licensing agreements worldwide. Japan’s Hitachi Metals, for example, holds many of the most high-end patents. Without those licenses, other manufacturers may face difficulties in making cutting-edge magnets. As a result, Chinese rare earth magnet makers that export to countries where Japan has applied for patents are compelled to pay expensive licensing fees, even as China has built up its own arsenal of rare earth patents.
“[This] has led to a long-term trend of increasing volume and decreasing price for Chinese rare earth permanent magnet exports,” three researchers wrote in a paper published this month (pdf, link in Chinese). “In this case, the export costs of Chinese enterprises are infinitely increased, making it difficult for them to ‘go out’.”
Update, May 17 and 18: This article removed a quote from Nabeel Mancheri, secretary-general of the Rare Earth Industry Association, to reflect more fully the REIA’s position on rare-earths patents and Chinese magnets, and included a quote from the association’s president.