Permanent Magnets – Business under transformation?

Have spent some time to better understand Neodymium magnets (NdFeb) landscape.

TL;DR version:

• Neodymium magnets (NdFeb) are critical in defence applications (ship propulsion systems, guided missile actuators) and high precision industrial applications (electric vehicles, rotors for wind turbines) as they are the strongest permanent magnets commercially available and improve the efficiency of electrical machines making them essential in high-temperature applications.

• Demand for NdFeb magnet is expected to increase exponentially in coming years. > 3x in next 7 Years. However, US has almost negligible domestic capacity and is mostly dependent on imports. Chine is holding a dominant position globally – not only in end product (NdFeb magnet) but entire value chain.

• Dependence on China leaves U.S. firms and U.S. allies vulnerable to Chinese coercion that could have a negative impact on national defence and the preservation of domestic critical infrastructure, such as transportation and energy.

• All of the above factors converging together to force US policy shift and desperation to make US self-dependent (as much possible) on NdFeb magnet production eco-system.

Global Demand Mapping:

• Total global demand for NdFeB magnets is expected to grow dramatically over the next decade, increasing from 119,000 tons in 2020 to 387,000 tons by 2030 and over 750,000 tons by 2050 in a net zero carbon emission scenario.

• USA estimated total demand at about 16,100 tons in 2020. Which is projected to increase under a high growth scenario to 37,000 tons in 2030. Specifically for US, Electric vehicles and offshore wind turbines will drive this growth and are projected to account for almost 30 percent and about 36 percent of NdFeB magnet demand, respectively, by 2030.

  • Accelerated shift towards electric vehicle – USA is expected to have > 50% of all new vehicles sold be electric by 2030. NdFeB magnets are used in electric synchronous traction motors for propulsion systems in battery and hybrid electric vehicles. Each electric vehicle motor typically requires 1-2 kg of permanent magnet material

  • Offshore wind turbine generation – As part of clean energy objectives, US has set out a goal of deploying 30 gigawatts (30,000 megawatts) of offshore wind power by 2030 (from current capacity of 42 Megawatt). Within wind turbines, NdFeB magnets are used in permanent magnet synchronous generators (PMSG), also referred to as direct drive generators. The size of the permanent magnet is typically 2.7-3.2 tonnes per MW of wind turbine capacity

• The United States directly imported about 7,500 tons of sintered NdFeB magnets in 2021. – 75% of this from China while rest 9%, 5% percent, and 4% coming from Japan, the Philippines, and Germany, respectively.

• Direct imports of NdFeB magnets represent only a portion of U.S. consumption and the majority of U.S. demand is in the form of imported products with the magnets embedded in them.

Supply Side Equation across Production value chain:

Global supply landscape across NdFeb value chain:

Step 1: mixed rare earth element mining

• The top upstream producers of rare earth minerals in 2021 were China (60%), the United States (15 %), Burma (9% percent), Australia (8%) and Thailand 3%) with smaller amounts coming from Madagascar, Russia, India, and Brazil. The largest single source of REs in the world is the Bayan Obo mine in China

• In US, MP Materials and Chemours has rare earth mining operations. Some estimates suggests that total rare earth oxide production from Mountain Pass mine California was 26,000 tonnes/year in 2019, and MP materials reported producing 38,500 tonnes/year in 2020.

Step 2: Rare earth elements carbonates and Oxides processing

• China 89% while Malaysia comprises 7% percent of the market for rare earth oxide separation (due entirely to the Australian firm Lynas Rare Earths operations in Malaysia), Estonia accounts for 1%.

• In US, MP Materials produces primarily light RE elements, such as Nd and Pr, from the Mountain Pass mine in California. They currently send the concentrate to China for separation of rare earth oxides, but have raised funding (including through an award under the DPA Title III program) to finish rebuilding their domestic separation processing facilities, originally built by Molycorp, with the goal to begin production in 2022. If it processes all of its current production of concentrates, this could represent about 12% of current global rare earth production. MP Materials has also stated its intentions to establish a complete domestic supply chain from mining through magnet production.

• Also, Lynas is planning a separation facility in Texas through its subsidiary Lynas USA LLC, with support from the DPA Title III program, which would be able to separate both light and heavy REs. With the addition of the light rare earth processing facility, it was estimated that, between its plants in Texas and Malaysia, Lynas would be able to produce about 25% of the world’s separated rare earth oxide

• USA Rare Earths, which owns the Round Top deposit in Texas, has reportedly made progress in developing a separation facility in Colorado.

Step 3: Reduction of rare earth oxides into metals

• China holds 90% market share. Outside of China, production of metals is fragmented between Estonia, Laos, Thailand, the United Kingdom, Vietnam, and other countries, with no country having more than three percent of the market

Step 4: Alloying of rare earth metals and Magnet Manufacturing:

• China market share of 92%. Japan is the second largest alloy and magnet producer (seven percent in 2020), and its firms produce metals, alloys, and magnets in Japan, Southeast Asia, and China.

• Outside of China, major manufacturers of alloys and powders include Hitachi Metals (a Japanese company being purchased by U.S. investment company Bain Capital), Shin-Etsu Chemical (Japan), TDK (Japan), Vacuumschmelze (a German company owned by U.S. private equity firm Apollo) and its subsidiary Neorem (Finland), Neo Performance Materials (Canada), Less Common Metals (UK), and possibly Magneti (Slovenia). Shin Etsu produces magnets in Vietnam via Shin Etsu Magnetic Materials Vietnam; and Neo Performance Materials (formerly Magnequench) produces powders for bonded magnets in China and Thailand.

• In US, lone domestic producer, Urban Mining Company (now called Noveon), manufactures sintered NdFeB magnets from recycled material and has received funding from the DPA Title III program

Patent/Know-how challenges:

• NdFeB magnets were concurrently invented in 1983 by General Motors in the United States and by Sumitomo in Japan. The Sumitomo intellectual property passed to Hitachi, which has an extensive NdFeB magnet-related patent portfolio of over 600 patents, including about one hundred U.S. patents

• Many U.S. companies noted that Hitachi has repeatedly declined to offer licenses to U.S. companies. Hitachi granted licenses to eight Chinese firms as early as 2013, which facilitated Chinese firms’ entrance in to the sintered NdFeB magnet market.

• Hitachi has also defended its intellectual property rights in U.S. courts. In 2012, Hitachi filed a complaint with the United States International Trade Commission (U.S. ITC) against 29 manufacturers and importers of sintered rare earth magnets

• Some industry representatives also expressed hope that the acquisition of Hitachi’s magnets business by Bain Capital may change Hitachi’s willingness to license the patents to potential market entrants

• In contrast, Noveon relies on new proprietary technology to process recycled magnets and produce new material and is therefore unaffected by Hitachi’s reluctance to license its patents

Efforts to revive US domestic industry:

• Proposal to establish a tax credit for domestic manufacturing of rare earth elements, NdFeB magnets, and NdFeB magnet substitutes.

• The bipartisan legislation would establish a $20 per kilogram tax credit for rare earth magnets manufactured in the United States, and an enhanced $30 per kilogram credit for magnets manufactured in the United States for which all the component materials are produced domestically.

• The Department of Defence (DoD) has made several notable awards through the Defence Production Act (DPA) Title III program to firms in the NdFeB magnet value chain. These awards have largely focused on the development of oxide separation and sintered NdFeB magnet production facilities.

• Eligible U.S. NdFeB magnet industry participants, including NdFeB magnet manufacturers and producers at upstream and downstream steps in the value chain, should be encouraged to apply for loans from the Export-Import Bank of the United States (EXIM). (15 percent or 25 percent depending on firm characteristics)

• Mandate minimum domestic and ally content requirements for NdFeB magnets used in U.S. Government-owned electric vehicles and offshore wind turbines that power U.S. Government-owned buildings. NdFeB magnets used in these products should be produced domestically or by allies and contain feedstock sourced domestically or from allies.

[worth paying attention to the pharsing around “ally content”/”ally countries ]

• Defense Federal Acquisition Regulation Supplement (DFARS) that restricts the use of foreign NdFeB magnets in the military supply chain from 2019

Key US players – Current standing and future outlook:

Key US players in different stages of NdFeb manufacturing process are:

1. Noveon (erstwhile Urban Minning Co.)
2. MP Materials,
3. Quadrant Magnetics, and
4. USA Rare Earth

• Noveon (erstwhile Urban Minning) – Is the only manufacturer of NdFeb today plans to expand production over the next four years. Noveon’s Texas facility is commercially operational and on-track to produce approximately 2,000 tons of magnets annually by 2024. In July 2020, under DPA Title III, Noveon was provided $28.8 million to develop NdFeB magnet manufacturing, which will begin in 2022 and ramp up thereafter. Noveon later received $0.86 million for an inventory demonstration.

• MP Materials announced in 2019 that it was spending $200 million to establish a domestic processing and separation facility and announced in February 2022 plans to spend $700 million to establish a vertically integrated NdFeB magnet supply chain in the United States

  • MP Materials (along with Noveon) have received Department of Defense funding. They are looking to develop U.S. capacity in pre-magnet value chain steps, including rare earths mining, rare earth carbonates processing, rare earth oxides separation, metallization, and alloying.

  • MP Materials $35 million under the IBAS program for a heavy rare earth oxide separation facility, on top of a previous $9.6 million commitment in December 2020 to develop light rare earth oxide separation capabilities. MP Materials expects to commence production by the end of 2022.

• Quadrant (Project code name NeoGrass) : Quadrant has announced the construction of a rare earth magnet manufacturing campus in Louisville, KY, under the project name of NeoGrass. Quadrant is investing more than $95M on this multi-year expansion, bringing approximately 200 full-time jobs.

• TDA Magnetics – In November 2020, DoD also provided $2.3 million in DPA Title III funding to TDA Magnetics for a rare earth element supply chain study.

• Lynas USA LLC, a subsidiary of Australian mining firm Lynas Rare Earths, received $30.4 million to establish a facility to produce light rare earth oxides, including neodymium. This facility is also expected to produce heavy rare earth oxides such as dysprosium

Based on forecasted NdFeB magnet production, domestic sources could potentially satisfy up to 51 percent of total U.S. demand by 2026. From 2022 to 2026 import penetration could fall to as low as 49 percent as domestic production ramps up

NdFeb Magnet substitute Development efforts:

• Iron-nitride magnets, made of iron and nitrogen powder, have several attractive qualities and may become a viable alternative to NdFeB magnets.

• Niron Magnetics is seeking to commercialize iron-nitride magnets as a substitute for NdFeB magnets. Iron-nitride is a high magnetization compound that has been known for many years, but which has yet to be commercialized because of the difficulties involved in manufacturing. In 2021, Niron Magnetics raised $23 million in its latest funding round

In conclusion, rare earth based magnets – specially Neodymium magnets has mission critical application from two critical perspectives: a) Defence and Military equipment’s manufacturing self-reliance, b) Enabling shift from fossil fuels by way of adoption of Electric Vehicles and Wind Power generation. While USA is aggressively strengthening its domestic manufacturing capabilities, its equally important for them to have strong supplier base within allies countries across the global. More so, since most of the end products where NdFeb is used is still manufactured outside of US.

Specifically for Permanent Magnets co., this white space ex-US could be an interesting opportunity. Even, the recent press release and concall etc. are suggesting that the proposed partnership/JV with Quadrant may explore such opportunties.

A world of caution though, specifically for Permanent Magnets co., this is still an evolving story. As of today, they may have some peripheral competencies in metallurgy and different magnet manufacturing however nothing directly related to Rare Earth based magnets manufacturing. Will have to see their placement in value-chain, construct of partnership, value-add potential and scalability scope etc.

Thanks,
Tarun
Disc: Invested