Lauren McKinley
Thank you for joining today’s important topic as we discuss this critical supply disruption. I’m excited today to be joined by our presenter, Olivia Saunders, a senior analyst at our intelligence solutions team. Olivia will walk through the latest news related to this topic and supply chain impacts that leaders should be aware of. With that, I will turn it over to Olivia. If you have any questions, please feel free to drop them in the q and a box and we will get to as many as time allows.
Olivia Saunders
Great. Thank you so much Lauren, and thanks so much to everyone for joining the session today. As you’ve all probably seen by now, there have been increasing concerns over the last couple of weeks about shortages of seven rare earth minerals and their derivatives, mainly magnets, stemming from Chinese export control that went into effect about a month or two months ago. And so we’re going to go over some of the main regulatory issues, some of the key challenges that suppliers have been facing and sort of what can expect over the next few months. So getting into some of the background and key policy kind of issues that are at hand here.
The Chinese government on April 4th issued an export control measure affecting seven rare earth minerals. So those minerals are cerium, gadolinium, terbium, dys bros, lutetium scandium, and atrium. And so the measure affects not just raw materials and refined rare earth metals, but it also affects products containing these minerals, especially. Magnets have been really the big concern. And these seven rare earth minerals are really important components for magnets that power electric motors because when we treat magnets with some of these minerals such as dys, tur, Sumerian, we see that the magnets become much more heat resistant and that has a lot of applications for the automotive sector, for aerospace, for robotics, and these minerals are also used in the electronics industries as well. So as a part of these regulatory changes, the Chinese government is now forcing all exporters domestic and international of these products to apply for a license with the Chinese government, which the Chinese government then reserves the right to accept or reject. And we’ve started seeing a flow of these licenses coming in the last month in the last few weeks. But so far the amount of exports that have been approved under this licensing system are far outweighed by the supply needs in the market right now. And there has been a lot of increasing concerns surrounding bottlenecks X supply disruptions. It’s really unclear the standards by which the Chinese government is sort of judging these license applications.
So would we consider, sorry, could you move to the next slide please? Thank you. So these are some of the major end uses for the affected minerals. So starting with heat resistant rare earth magnets, that’s really been the key concern at this stage because they’re key for automotive production. They have a number of automotive uses in electrical motors that are found throughout cars because again, when you treat with the seven rare earth minerals, specifically the motors and the magnets used in these cars can operate at a high heat level, which is great when you’re looking at a motor near an engine, for example. So these magnets are really, really key. And so a lot of the most imminent production disruptions that we’ve been hearing about have been automotive companies just because of the nature of having low stockpiles and the just in time production. Additionally, we’ve also seen a lot of concerns about the semiconductor manufacturing.
Obviously very high interest for a number of sectors, so there haven’t been any reported disruptions as of now, but definitely something that manufacturers are keeping an eye on, especially in the eu. And then additionally, there’s a lot of other uses for these heat resistant magnets. So aerospace and defense jet engines is another key use often using Sumerian based magnets in the aerospace sector, again, Sumerian being one of the seven minerals. And these motors are also used for a number of different electronic products, robotics, wind turbines, just a lot of different sectors are using these magnets, but so far the supply disruption seems to be most imminent in the automotive sector. And then in addition to these magnet uses, there are a few other uses that are unrelated to magnet. So these seven minerals are used in ceramic capacitors for minerals such as dys bros cerium. They’re used in a wide variety of electronic devices, consumer electronics, medical devices, industrial electronics, so really wide range of use there. And then there’s one additional use of these minerals in the life sciences sector with gadolinium being a key product in MRI contrast agents.
So when we look at the supply locations of these rare earth minerals, we begin to really understand why these export controls are such a big deal. They are really crippling to the global economy for rare earth minerals. And you can see here this is refinery capacity by country. We see that China, by far and away dominates other countries for rare earth refinery capacity. And in addition to this, the seven rare earth minerals that have been affected by this specific policy, many of them are considered heavy rare earth minerals and heavy rare earth minerals are mined almost exclusively in China. So we can see of course that China really dominates the market for refining these materials.
And then we can also see that China also dominates the market for rare earth magnets. So China produces about 92% of the world’s rare earth magnets. Japan is the other major supplier, but many Japanese supplies are sort of tied up with Japanese manufacturing companies already. So I wouldn’t really say that this supply is available for other countries in any meaningful sense. So we really see that China dominates a lot of the available capacity for these rare earth magnets, which is why essentially having these licensing system having a lot of delays to it as essentially almost functionally stopped all exports of these magnets. There have been a few licenses granted, but still far, far, far below what global supply needs need.
And so there are quite a few regulatory issues that have caused a wide variety of supply disruptions. So with the current pace of licenses, again, there have been some licenses approved in the last, I would say two to three weeks, some for domestic manufacturers, some for international manufacturers. So it does seem like the Chinese government is starting to get this process a little bit more standardized, but it’s really been a slow trickle of licenses compared to sort of the flood of demand that’s really needed right now. So even for companies like Volkswagen that they have been receiving some limited degree of product out of China since one of their suppliers was approved, even then, we’re still going to experience a lot of bottlenecks, still going to experience a lot of supply issues just because this pace is so slow compared to production and it’s really insufficient, especially for the amount of product that’s needed in the automotive sector.
Additionally, to make matters worse, on April 4th when this policy was put into place, companies really did not have sufficient stockpiles to handle this. Of course, there’s always a certain degree of risk when handling China, but there wasn’t a lot of warning that this policy was going to go into place. So at the time of the trade restriction, many automotive suppliers especially did not have high enough stockpiles to weather this storm. And that’s why we’re seeing production disruptions really so quickly after some of these trade restrictions because again, they’re almost completely dependent on supply for China. So to have these export controls and to really meaningfully limit the amount of product that’s being exported has just been really crippling to these companies. In addition, there have been a lot of issues related to regulatory uncertainty. So it seems like again, with these trade restrictions being so new, there’s actually been a lot of uncertainty within China on how to enforce them and how to sort of set expectations for getting licenses.
So one of the key issues is that there’s a lot of uncertainty surrounding the timeframe for obtaining a license. This month we’ve started to see the first few licenses being granted, and those have taken about four to six weeks at the earliest. And we’re also seeing estimates that licenses could take up to several months, especially in sectors that are sort of seen as sensitive such as the military and defense sector, or there’s also been concerns that companies from the US or major manufacturers might also be affected as due to the ongoing political tensions. But again, we don’t really know exactly what the criterion is for them to accept or reject a license. They haven’t shared firm guidance on that. And so that’s why it’s really hard for companies to estimate, okay, do I stop production now? Will I get a shipment in a week? Will I get a shipment in a month?
Companies really don’t know when their next supply shipment is coming, if a license has not been approved yet. In addition, there have been a lot of delays to customs clearance for rare earth products or even products that seem like they might contain these minerals, which as you can imagine is pretty confusing. So there’s been a lot of scrutiny against magnets in general, whether or not they contain these seven magnets. So there have been reported instances of Chinese customs officials seizing almost everything or seizing anything that looks like it could contain these products or holding off on export because they’re not sure about the specific tariff codes that have been affected. There’s also been an issue with some customs clearance officials requiring companies to provide pretty solid documentation of that. These products do not contain depos, they don’t contain turia, they’re only related to other metals, but the enforcement of this has been very uneven at a lot of Chinese ports, and we’re seeing a lot of different things happening at different locations throughout China, which of course has increased confusion, and that’s something that hopefully will be resolved I think maybe more in the short term just because it’s improved at least a little bit since the beginning of the trade restrictions.
And as customs officials become more comfortable with these licenses, hopefully some of these issues can be resolved, but at least in the short term, this has been another cause of delays even for products related to these minerals that don’t necessarily fall under the Chinese trade restrictions. So just a lot of regulatory uncertainty and delays there. In addition, the relationship of these export controls to the US China trade conflict at this time is really unclear. Of course, it does sort of seem related to the ongoing tariff situation because on April 4th when these are released, that was two days after US President Trump released higher tariffs on China amounting to about 145%. So these export controls were issued sort of in a package with other trade restrictions on the us. And as you may know, earlier in May, the US and China reached a deal to mutually decrease tariffs and non tariff barriers for 90 days, so until July 9th, but it still hasn’t really been effective in removing this measure.
And we’ve actually seen quite a bit of frustration from the Trump administration because of that, because in their view, they expected that this would be removed as part of the mutual agreement to decrease non tariff barriers. And obviously it has not been removed on the Chinese side. Many people are seeing this as a response to US restrictions on technologies from Huawei and also on exports of semiconductor manufacturing machinery. So from Chinese official statements, they’re sort of posing this as a response to what they see as unfair US trade practices. So it is very much tied into this US China trade relationship. But that said, there’s been a lot of confusion because this policy doesn’t just target the us, it’s global. It targets every country with the eu seeing some of the most eu, India seeing some of the most major impacts. And so I think there’s been a lot of questions as to if this was meant to target the us, why is every country being affected?
One possible explanation is that the US has sort of been reportedly encouraging countries to decrease their economic ties with China during bilateral reciprocal tariff negotiations. Those have been ongoing since the reciprocal trade measure in early April, which if enacted would target every country, every US trade partner. And so as countries are negotiating those trade deals in response to the reciprocal terrorists, the US has reportedly been sort of pressuring these companies to maybe cancel deals with Chinese companies or invite more scrutiny over Chinese contractors, just kind of discouraging Chinese economic ties. And obviously this has garnered a pretty negative reaction from the Chinese government. So there’s been maybe a thought that some of these export controls are sort of intended to give the Chinese government more leverage to discourage other countries besides just China and the US to discourage them from decreasing their economic ties with China.
So there’s a lot of potential explanations, but I think this is really important because we don’t really have the clear goals of the Chinese government. There’s been some suggestions that maybe American companies could be targeted, maybe military and defense companies would be targeted, but without really clear guidance from the Chinese government, it’s really hard to say certain with certainty what kind of companies are going to face bigger disruptions. And related to that is that there’s end use restrictions with the current documentations that companies have to provide to receive these licenses. So companies are providing pretty detailed information on their end use customers. Again, we can assume that this is being used for the Chinese government in determining who gets approved and who gets rejected for a license, but there hasn’t been any clear guidance on what kind of end use is not acceptable, but companies are having to provide a lot of this information and it might be used in the future.
So going through some of the supply disruptions that we’ve already seen, a lot of countries and companies and industry associations are all still involved in negotiations with the Chinese government trying to get these export controls reduced, maybe get exemptions. So far there haven’t been any major measures, but negotiations are still ongoing. So we’ve seen a lot of different concerns by region in the European Union. There have been production stoppages expected this month for hundreds of companies if they’re not able to receive more exemptions or more licenses. So far, there have been a small number of licenses approved to European Union suppliers, but again, it’s really insufficient to meet the demand. So I think there’s strong hopes that more licenses will continue to be granted, but again, the timeframe for that is extremely unclear, so it’s hard to say with any certainty if that’s likely or not.
Additionally, in the US production stoppages are also expected within weeks, mainly in the automotive sector. That’s where the most concern has been in the eu, it’s mostly automotive as well, but there’s also been some concern from semi semiconductor and electronic manufacturers. In Germany specifically, again, we’ve seen a lot of concerns about production disruptions mainly due to supply bottlenecks. And in India, there’s been a very severe concern because no export licenses have currently been approved to Indian companies. And so Indian auto manufacturers are quite concerned about this measure. The Indian government has been really rapidly trying to reach an agreement with China on this and improving its guidance for Indian companies so that as soon as they get those licenses, they can restart production immediately. But so far, if there’s no change to the status quo, we can expect India will run out of these rare earth magnets by early mid-June. Additionally, Japan and south being such major automotive and electronics manufacturers are of course potentially impacted by this. So far, their impact has been less strong compared to other countries because due to past trade conflicts with China, both Japan and South Korea had slightly stronger stockpiles compared to their Western counterparts. But of course, if these export controls continue in their current form for months and months, it’s hard to say if this will hold, but for right now, their production disruptions are not expected as imminently as for the eu, the US and India.
And this is sort of a sample of production disruptions that we’ve been tracking. Not all companies have confirmed publicly, but based on negotiations, we do know that again, in the EU and the us, we’ve seen estimates that hundreds of production sites could be affected. So there just hasn’t been as much release. But this is a sample of some of the companies that have already confirmed production disruptions or have anticipated production disruptions over the summer. So Ford has already halted production at its factory in Chicago from May 10th to 19th due to the shortage Tesla. So far no confirmed automotive impacts, but we have heard that they’ve delayed their production of robots again, because in addition to the automotive sector, these rare earth magnets containing these seven minerals are used in robotics as well. Bosch, the automotive supplier from Germany is another key company that’s been affected.
They’ve indicated that the lengthy export license application process has already started to cause bottlenecks in their supply network, and we may see disruptions in the coming week to production. And then again in India, the situation is fairly dire at the moment. We’ve seen that TVS motor and Bajaj auto expect production halt in the next month or two if no additional magnets are received. And Mardi Suzuki is currently in direct negotiations with the Chinese government, but so far it doesn’t seem like production has been disrupted, but the situation could worsen if it’s not able to come to an agreement with Chinese government on providing these rare earth materials.
So just to summarize some of what I think companies can expect over the next few weeks, we’re already seeing a lot of supply disruptions and we can expect that more are going to follow in the next few weeks. Of course, there’s just a lot of certainty over how many licenses will be granted, how fast the turnaround will be, if the process will be more standardized, or even if a US China trade agreement could sort of minimize these risks. But I would say even if export controls are revoked, if the US and China reach a deal tomorrow and the measures revoked immediately, we can still expect quite a few lingering supply disruptions for that. Again, because the supply of these rare earth magnets has been almost completely cut off for almost two months now. So we can see that the export controls, they’re going to have a pretty lingering impact for some time.
And moreover, it’s probably not going to end tomorrow. We’re probably going to see continued disruptions at least for the next few weeks. And during that time, the pace of license grinding will really affect whether production disruptions happen and how widespread they are. So in addition to that, there have been some possibilities raised of exemptions for semiconductor machinery manufacturers, specifically for China and Europe. This was proposed by the European Chamber of Commerce, and the Chinese government has indicated that they’re considering it, but we don’t really know more than that. It could be just as part of negotiations or this could be coming in the next few months, but there haven’t been any. If there are exemptions and they do in fact go into place, we don’t really have any information on how they would work, what companies would be affected. So all very tentative for right now, but that is something to watch out for in the next few weeks.
And it’s possible that negotiations with other countries could also contribute to further exemptions in other sectors. So it’s definitely possible. It just hasn’t really taken shape yet. In addition, the direction of US-China negotiations is likely to have a big impact. So I would say right now there’s been a lot of tension over these export controls in the US-China relationship. President Trump, I believe, spoke out on social media about it, the feeling that it’s really harmful to the US and that it’s unfair to the trade agreement that was reached earlier this month. So I would say in the current direction, we can sort of expect that maybe US companies will be more targeted, especially those companies with ties to the US military and defense sector. The Chinese government has already spoken that they really don’t want these products used for the military and defense industry. So I would say that sector is pretty at risk of supply disruptions from these export controls and unlikely to have those licenses granted.
But again, if the US and China were to come to an agreement more quickly, then it’s possible that these export controls would be loosened less restricted or even revoked entirely. So it really is going to be dependent on the status of negotiations. Additionally, over the coming months, we hope that more guidance will be issued as the Chinese government works through these customs issues. We hope that there’s going to be more of a standardized process for companies to get their shipments approved. And also, as the Chinese government starts to clarify, its guidance on what kinds of shipments are acceptable, we can see more consistent approvals or ejections of licenses that will give companies a better idea of what to expect. But until this sort of happens, we do see some immediate supply impacts as likely, especially in the eu, the US and India, and then of course Japan, South Korea, and other automotive manufacturers if this drags on for quite some time. So it really depends on that, but we do see some production impacts coming in the next few weeks. Great, thanks. So I will turn it over to Lauren for q and a.
Lauren McKinley
Great, thank you Olivia. And thank you everyone who is attending. If you have any questions, please feel free to pop them in the chat. Looks like we’ll have a time to get to a couple of questions today. So one of the questions, Olivia, is just kind of a recap. Could you explain a little bit more, I know you mentioned this earlier around the amount of time it takes to get a subcontractor license. It looks like research shows that out of the hundreds that have been applied for so far, about a quarter have been accepted and it’s a slow moving process. Can you just go back to that a little bit and explain that timeline for companies that are looking to get that license?
Olivia Saunders
Yeah, certainly. So the timeline is pretty unknown at this time. As I mentioned, this month we’ve seen the first licenses approved, and those have taken about four to six weeks From the first submission. We saw a lot of Chinese domestic firms being approved first. Then South Korean manufacturers were kind of the second international manufacturers to be approved. And then now there have been a few European suppliers as well that have been approved. So there have been some recently that have been approved. The question over the length, there’s a lot of different estimates for companies that are a bit friendlier. I would say four, six, maybe eight weeks would seem pretty standard. But again, companies with ties to the military and defense sector or companies with high ties in the US I think maybe should expect a little bit longer than that. Again, it’s really hard to say because there’s not clear guidance, but some estimates for some of the more, I guess, controversial companies or companies that the Chinese government has a less positive opinion of, I think those should expect at least two to three months is kind of the estimates that I’m seeing.
But obviously we haven’t passed that point yet, so it’ll just take some time to sort of see whether those applications are ultimately approved or not. But yeah, I would say it kind of ranges from four to six weeks to three to four months is kind of the estimate right now.
Lauren McKinley
Great, thank you. Okay, the next question is around the decrease of exported rare earth materials from China. It’s like we’ve decreased or China has decreased the amount of export about 50% in April. We’d have to go back and double check that stat. But the question is around clients that we’re working with and general diversification away from China for metals and other materials. Are we seeing anything or do we have any insight around clients investing in Japan or other countries?
Olivia Saunders
I’m pretty sure I can confirm that 50% statistic. That is sort of the number that we’re seeing right now that is accurate. So the short answer is for these specific rare earth minerals, I think companies would like to, but there’s just no viable alternative source at the moment. Of course, we’re seeing potential for rare earth mining expansion in Australia, Brazil, I think the US is also has at least one or two suppliers that are trying to increase their magnet processing capacity. We are seeing companies take a pretty high interest in this, but obviously those investments take years and years to develop, and there aren’t really any other major products outside of the Chinese and Japanese supply networks. And again, the Japanese supply networks relating mostly to Japanese manufacturers and also still sourcing a lot of their material from China originally. So of course there’s a really high demand for diversification in this market, but it’s just going to take time to get there. And even then, I believe I saw there’s only one or two viable projects that are going on in the US and that would only really supply just a fraction of what the Chinese government is producing at this time. So hopefully in the future there will be more diversification, but in the short term right now, there’s just not really good alternative source for these seven metals specifically. Again, really the lion’s share is still produced in China. So unfortunately in the short term, there’s not really a good alternative.
Lauren McKinley
Thank you. Okay, so I think we have time for one more question just related to material commodity supply tracking and risk. Could you explain a little bit about how our team is helping clients track these materials, other materials and the risks related to them with our technology and with your team?
Olivia Saunders
Yeah, of course. So our intelligence solution team provides 24 7 monitoring on all issues, including trade restrictions, commodity related issues, and all sorts of production related disruptions. We’re also keeping a close eye on supply disruptions as well. And these with ever stream’s technology customers can receive timely alerts about any of these suppliers in their supply networks to understand more about how trade restrictions will impact their businesses. And so our team is really focused on researching this on a 24 7 basis, making sure that we can provide companies with the most up-to-date information about their supply network as it relates to the trade restriction situation. Great.
Lauren McKinley
Great. Thank you so much, Olivia. I appreciate it. I think with that, we’re at time. If anybody has any other questions, please feel free to reach out to [email protected]. Olivia and our intelligence solutions team are also providing constant updates on our everstream.ai risk center, and clients get access to even more detailed insights related to how these and other updates, risk updates, trade tariff restrictions, update and impact their network. So if you’re interested in learning more, please reach out. With that, we will send this recording out to all after the session. Again, thank you so much for joining us today and have a great day.