Exclusive: Rare earths magnet firms turn to Vietnam in China hedge

Workers transport soil containing rare earth elements for export at a port in Lianyungang, Jiangsu province, China October 31, 2010. REUTERS/Stringer Acquire Licensing Rights

HANOI/SEOUL, Aug 22 (Reuters) - Korean and Chinese magnet firms, including an Apple supplier, are set to open factories in Vietnam, according to documents and people familiar with the plans, amid a push to diversify supply chains away from China and defend against Sino-U.S. tension.

South Korea's Star Group Industrial (SGI) and China's Baotou INST Magnetic would join companies in sectors as varied as electronics and automobiles in shifting assembly lines against a backdrop of increasing trade restrictions, with clients even requesting the move, the people said.

China is dominant in magnets and the rare earth metals they are made from. The magnets are central to the manufacturing of such products as electric vehicles, wind turbines, weapons and smartphones, making the sector strategically important. Even so, there has been only limited effort to challenge China's lead.

Neighbouring Vietnam, however, has untapped rare earth deposits second only to China's, as well as a fledgling processing industry, giving the country the potential to be a much bigger competitor, industry insiders said.

SGI's Vietnam project, for instance, targets 2025 output of 5,000 tons of high-end neodymium (NdFeB) magnets per year, enough for 2 million electric vehicles (EVs).

Still, Vietnam produces just 1% of the world's magnets, showed Adamas Intelligence data cited in a U.S. Department of Energy report, compared with China's 92%.

Moreover, some Chinese factories can produce 10 times as many magnets as SGI's project, and China dominates the mining and processing of the ores.

Nevertheless, Vietnam's rise is significant.

SGI's plant at full capacity would produce nearly 3% of the 2022 global output estimated by Project Blue, a critical materials consultancy. That equates to nearly half of U.S. imports of neodymium magnets last year, U.S. trade data showed.

Moreover, U.S. officials have signalled growing interest in Vietnam's rare earths potential amid discussion to upgrade bilateral ties this year, and South Korea signed a deal with Vietnam in June to boost its supply chain of critical minerals.

Magnet makers are also drawn to Vietnam by low labour costs and market access afforded by multiple free-trade deals. They also want to move closer to Vietnam-based clients, such as automakers and electronics firms, which are increasingly wary of over-reliance on Chinese supplies as relations worsen between Washington and Beijing, industry insiders said.

Vietnam is the only country beyond China with all stages of the magnet supply chain, from mining rare earths to downstream production, said a Vietnam-based industry consultant, who was not authorised to speak to media so declined to be identified.

The government plans a vast expansion of rare earths production by the end of the decade and is boosting refining capacity, which the U.S. energy department estimated accounts for 3% of the global share.

However, "anyone who is trying to build from scratch a mine-to-magnet supply chain is going to face a lot of challenges," said David Merriman of Project Blue.

SGI, which supplies magnets to Vietnamese EV maker VinFast and Korea's Hyundai Motor (005380.KS), told Reuters it is investing $80 million in its new Vietnam factory with production starting in 2024.

The plant would nearly double the company's current output of 3,000 tons a year from factories in South Korea and China.

SGI described the investment as part of "countermeasures" against possible Chinese trade restrictions.

"China's policy on control of rare earths-related raw materials and technology is being strengthened, resulting in supply uncertainty," SGI said.

It said it sources most of its rare earths from China but is seeking alternative sources in Vietnam and Australia and plans to develop a processing facility in Vietnam.

China's INST is set to begin operations as early as next month at a leased plant in northern Vietnam after gaining local approval in June, two people familiar with the plans said.

INST, a large magnet firm specialising in circuit design, was added to Apple's (AAPL.O) supplier list in 2021. Its expansion into Vietnam follows requests from clients to diversify away from China amid growing trade tension, the two people said, declining to identify the clients.

China's Luxshare (002475.SZ) and Taiwan's Foxconn (2317.TW) are among major Apple suppliers who manufacture magnet-equipped products in Vietnam such as iPad tablets and MacBook laptops.

INST's initial investment is limited to a few million dollars, with a possible second phase involving more spending for the building of its own plant, the people said, declining to be named as they did not have clearance to discuss the matter.

INST did not respond to Reuters when seeking comment.

A similar request from clients prompted another Chinese magnet maker, Magsound, to decide to open a factory in Vietnam in the first half of next year, the two people said.

However, after winning approval in June, Magsound withdrew plans this month, registry documents showed, which the people said followed the collapse of supply deal talks with Luxshare.

Luxshare and Magsound did not reply to requests for comment.

Among magnet makers in Vietnam, Japan's Shin-Etsu Chemical (4063.T) has been expanding facilities this year after deciding in 2017 to double annual capacity there to 2,200 tons, showed company statements and details on consultancy Obayashi's website.

Shin-Etsu and Obayashi did not reply to requests for comment.

In April, Australia's Strategic Materials (ASM.AX) signed a deal with a Vietnamese refiner that committed to supplying rare earths for export to South Korea.

Reporting by Francesco Guarascio and Ju-min Park; Additional reporting by Khanh Vu and Mai Nguyen in Hanoi; Editing by Christopher Cushing

Our Standards: The Thomson Reuters Trust Principles.

Thomson Reuters

Francesco leads a team of reporters in Vietnam that covers top financial and political news in the fast-growing southeast Asian country with a focus on supply chains and manufacturing investments in several sectors, including electronics, semiconductors, automotive and renewables. Before Hanoi, Francesco worked in Brussels on EU affairs. He was also part of Reuters core global team that covered the COVID-19 pandemic and participated in investigations into money laundering and corruption in Europe. He is an eager traveler, always keen to put on a backpack to explore new places.