Speaker Makers Say Surging Neodymium Prices From China At Crisis Stage

Last October and November, China imposed an unofficial export embargo to Japan, Europe and the U.S., according to a CEA report on rare earth mining updated in May of this year. In July 2010, China reduced its export quota for the second half of 2010 by 72 percent, the report said, and in December the government announced a 35 percent quota reduction for Q1 2011. Since April 1, China has raised taxes from less than 50 cents per kilogram to $8 per kilogram of refined rare earth product, the report said, and in May, China announced that it would not approve new rare earth mining or capacity expansion projects through 2015. That has caused prices of neodymium, along with other rare earth elements, to skyrocket.

In Harman International’s fiscal Q4 earnings call earlier this month (CED Aug 11 p5), CEO Dinesh Paliwal cited raw components price increases of 1,000 percent amounting to $85 million for the company, which is putting “anyone buying neodymium in a tough spot” and “lucky to get allocation.” With Harman’s scale the company is able to guarantee allocation for now, but the company will have to re-tool and make adjustments, he said. Harman is a top supplier in automotive, home and professional speakers.

"It’s a serious situation,” Robert Wills, president of InterSource OEM, told Consumer Electronics Daily. Wills buys neodymium magnets from factories in China and builds speakers in China for companies that include Alpine, Atlantic Technology and Sonance. What started as a manageable 10 percent rise in neodymium prices jumped, and kept jumping, from 100 to 200 to 500 to 1,000 percent, Wills said. “It’s out of control,” he said.

"The rising cost of neo magnets is indeed a problem,” said Doug Henderson, vice president-sales and marketing for B&W Group USA. Henderson cited 400 percent price increases for B&W that are forcing the company to review magnet design to try to reduce the mass of neodymium it uses through lighter tweeter domes and tighter voice coil gaps. But because of the benefits of the neodymium magnet -- exceptional strength for its size, enabling designers to fit speakers into the smaller cabinets that consumers demand -- “it is very hard to move away from it without major changes which would be difficult to implement,” Henderson said. “So we are focused on lots of little changes to use less magnet material without compromising performance,” he said.

The problem is hitting everyone in the speaker market who needs to trade off size and weight, and that runs the gamut from automotive to home-theater-in-a-box to in-wall speakers. Neodymium is “particularly important” in automotive applications because of the strong influence weight has on gas mileage, said Ken Kantor, a speaker designer for NHT and others and now president of ZT Amplifiers in Berkeley, Calif. “There’s a remarkable financial benefit to remove pounds from a car,” Kantor said, citing figures from his days “six or seven years ago” as an automotive speaker designer when Ford paid “something like $4-$4.50 a pound” for a car to be built. Pulling a single pound from a vehicle’s weight has an impact, especially at a time when “mileage sells,” he said. Using a neodymium tweeter in a vehicle enables car makers to “halve the weight of a speaker” and charge a premium for their designs, he said. Automotive speaker technology tends to drive speaker manufacturing in general and neodymium has become widely used in automotive tweeters, he said.

Neodymium is essential to flush-mounted speakers for custom installation applications where depth is limited by standard wall or ceiling thickness, said Gary Dayton, technical support manager for Thiel Audio. “To achieve the performance parameters in sheer output and frequency response, we need to have a compact motor system, which includes the magnet,” Dayton said. “For products like that we're strictly limited to the use of neodymium if we want to maintain the high level of performance.” Dayton cited Thiel’s HigherPlane 1.2 in-ceiling speaker, which cost Thiel 17 percent more in April to procure than its previous order with its supplier a year earlier, Dayton said. The hike was from price increases of “neodymium magnets alone,” Dayton said, although smaller, additional price upticks from aluminum and steel and an unfavorable exchange rate were also to blame, he said. Thiel passed along some of the price increase through a 10 percent hike in its suggested retail prices, he said.

When neodymium was affordable, designers used it liberally, we're told. Speaker makers routinely designed speaker grilles that attached to baffles using neodymium magnets “to take advantage of their strength versus size,” Dayton said. That frill could be a casualty of the new neodymium order, he said. If Thiel had to lose that magnetic grille feature to save money, “we wouldn’t be heartbroken,” Dayton said, but the company also had to rethink other audio designs where neodymium played a more acoustically meaningful role. Dayton described one project, the design of a large driver based on a neodymium magnet, that was about 80 percent done “when we kind of freaked out and started over on the driver so it would use a more typical ceramic ferrite magnet instead,” he said. For floorstanding and bookshelf speakers that don’t have such space constraints, Thiel can “reconsider our use of neo,” Dayton said, “but we need to be cautious about how much we'll have to invest in re-design a product for the sake of building it less expensively.” Alternatives include ceramic or an older-style magnet such as Alnico (made of aluminum, nickel and cobalt alloys), he said.

Those kinds of design changes aren’t easy to do, said Peter Tribeman, president of Atlantic Technology. Atlantic is one of the companies that use neodymium magnets to secure speaker grilles to the cabinet. The grilles “line up perfectly” with neodymium magnets built into the speaker baffles and their strength ensures “they'll never fall off,” Tribeman said. Eliminating neodymium magnets would require a complete redesign “because there’s not enough strength” in conventional magnets to hold a grille on, Tribeman said. “We designed them when neodymium was reasonable” and with virtually all of the company’s grilles made of metal to work with magnets, “now we're stuck,” he said.

Between 96 and 99 percent of rare earth elements, including neodymium, terbium and others are mined in China, according to a March 2011 executive trade briefing from the U.S. International Trade Commission. That dependence “exposes the U.S. economy to China’s export restriction policies which are aimed at encouraging domestic use,” the report said. Citing statistics from the Department of Commerce, the report said U.S. imports of rare earths from China rose by 314 percent between 2006 and 2010. China cut its annual rare earth export quota by about 20 tons for 2010 and issued a further reduction of 11 percent for the first half of 2011, the report said.

Kathy Gornik, Thiel president, is one of several CEA speaker manufacturer members who has asked CEA for help as “eyes and ears for the audio industry” to locate new supplies of neodymium as part of a “market solution” to China’s grip. “The market typically abhors a vacuum, and there’s a lot of money that could be made because these price increases are astonishing,” Gornik said.

Despite its label as a rare earth element, neodymium isn’t short on reserves, which are known to exist around the globe, including in Australia, Africa, Russia and in several western U.S. states. According to the USITC, the U.S. was once the world’s largest supplier of rare earths but halted production in 2002 due in large part to environmental concerns, one of which is toxic wastewater runoff from the mining process. A CNN.com report March 9 said a rare earth mine now owned by Molycorp Minerals was fined in 1998 for leaking hundreds of thousands of gallons of wastewater containing low levels of radioactive material.

Mining is ‘Dirty Business'

"The mining of these elements is dirty business,” said Sage Chandler, senior director of international trade at CEA. “There are a lot of environmental restrictions and it’s expensive,” she said. When China offered a cheaper alternative, rare earth mines here “just shut down,” she said. With China’s stronghold on rare earths now, countries are looking to become self-sufficient to take pricing power away from the Chinese government. There’s more of an appetite in the U.S. now for mining and “to do things right, spend the money on them and have a constant supply,” Chandler said. A number of bills have been “floating around” Congress regarding getting rare earth mines back online, but “none have gotten traction,” she said. Rep. Doug Lamborn, R-Colo., introduced the National Strategic and Critical Minerals Policy Act (HR-2011) in March. The bill’s text says “the industrialization of China and India has driven demand for nonfuel mineral commodities, sparking a period of resource nationalism exemplified by China’s reduction and stoppage of exports of rare-earth mineral elements necessary for telecommunications, military technologies, medical devices, and renewable energy technologies.” The bill cleared the House Natural Resources Committee July 20.

The investment required for education and engineering in mining is steep, and private companies are doing that more quickly than government initiatives, Chandler said. She cited Molycorp in the U.S., whose rare earths operation is located in Mountain Pass, Calif., and Lynas, based in Australia, as sources of neodymium. Molycorp announced a three-year pact earlier this month to supply Hitachi Metals with rare earth magnetic materials, including didymium, a mix of neodymium and praseodymium. In Harman’s earnings call this month, Paliwal referred to an unnamed potential suppler of neodymium in California. Molycorp didn’t respond to our questions about plans for neodymium mining or a possible relationship with Harman.

Japan is similarly concerned and led an expedition to assess the presence of rare earth metals on the ocean floor in the Pacific. Yasuhiro Kato, a geosystem engineer at the University of Tokyo, and colleagues, including researchers from the Japan Agency for Marine-Earth Science and Technology, estimated that an area of one square kilometer around a hotspot near Hawaii could hold 25,000 tons of rare earths. But the environmental impact of underwater mining is certain to face steep opposition even before a project could be launched to extract metals from the sea bed, observers noted. And yields from such an operation would be years, if not decades down the road, they said.

In response to U.S. concerns over China’s monopoly on rare earth elements, the World Trade Organization’s dispute settlement panel agreed with the U.S. in July, finding that export restraints imposed by China on several important industrial raw materials “are inconsistent with China’s WTO obligations.” According to the WTO’s statement, China’s actions were not justified as conservation measures, environmental protection measures, or short supply measures. Neodymium, however, wasn’t one of the raw materials on the list, which included bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus, and zinc that are used in the steel, aluminum and chemicals industries. When we asked if neodymium might be the subject of a future case, Nkenge Harmon, deputy assistant U.S. trade representative for public and media affairs, told us it’s not the department’s practice to discuss whether it may bring WTO cases. “Our preference, of course, is to resolve concerns cooperatively with China in a timely and effective manner that benefits U.S. businesses and workers,” he said.

Gornik, for one, hopes the WTO doesn’t get involved, she said. “That’s a very lengthy process and it would take years” to resolve, she said: “The market is so much more efficient in resolving these kinds of problems.” Monopolies are very easy to topple if you truly have a free market, she said. Gornik hopes other sources will come available and “we'll be able to compete on price so we can stabilize this ourselves,” she said.

CEA believes the industry can benefit from the WTO decision even if neodymium wasn’t part of the dispute per se. “It’s a good precursor to what could potentially happen if the U.S. and others decide to look at this in light of the WTO case,” she said. “It’s pretty serious business.” She said the pricing manipulation could “backfire in China’s face” as companies pursue other suppliers of neodymium and or other resources they can use in lieu of certain materials. “Business being business,” she said, “if a company can’t trust its supplier -- and if they end up finding the material a little more expensive out of Australia, but trust their relationships and their government -- Australia is going to see lots of customers."

For the electronics industry, the needs are far more urgent than an unlikely project years away from fruition. Even if there’s a neodymium discovery, “when and if they can produce it is years off,” Atlantic’s Tribeman said. “A long-term solution isn’t going to help us next month.” Tribeman compared neodymium prices to the commodities market. A quoted price for a neodymium tweeter is good for 48-72 hours, he said, but even then suppliers of neodymium tweeters have been known recently to raise prices by an additional one or two percent because they're being squeezed by their vendors. There’s has been some stabilization of neodymium pricing in recent weeks, sources said.

Even if companies found outside sources of neodymium, most manufacturing is currently done in China, which levies heavy tariffs on imported materials, sources said. Thiel explored the possibility of importing semi-finished neodymium products from other countries to its contract manufacturers in China. “We got a big, loud ‘No,'” Dayton said. Even if their contract manufacturer would agree to do it, duties to import raw materials into China were “through the roof,” he said.

Harman, for one, sought Mexico as a manufacturing alternative due to its reasonable labor rates and efficient transit time to the U.S., noted Eli Harary, a former sales executive at Harman and Boston Acoustics and now president of GEM CE Consulting. Harman built a factory in Tijuana, and calculated that it would cost the same to manufacture there “until our procurement people placed the first order for raw materials to be shipped to Mexico, and the raw materials didn’t cost the same as they did in China,” Harary said. He and others noted that Vietnam keeps coming up as a potential manufacturing location because of “good quality labor potential” and building growth. “But they have to import the raw materials from China,” he said, adding, “until we figure out how to make something here, we're at a big risk for cost increases."

Chandler of CEA concurred that tariffs in China have been a problem and something the U.S. government “will have to take up with the Chinese government.” The U.S. government “is very seriously looking at its options right now,” she said. Coming off the tail of a win with the WTO, she added: “The Chinese government had better start looking at where this could go for them if other countries look at this on the world stage."

The price hikes in neodymium are carrying over to alternative materials for some companies, said B&W’s Henderson. Tribeman of Atlantic calls it “collateral damage” and says his company has seen prices of conventional magnets go up about 20 percent in the past year. At Thiel, Dayton said the company has noticed some increase for ceramic magnet prices over the past 24 months, but “nothing dramatically out of the ordinary.” He said there’s “really no equivalency between neodymium and ceramic, and any change between the two requires re-engineering."

'Redesign Game Expensive'

Despite the exorbitant price hikes, Kantor of ZT Amplifiers doesn’t see neodymium being designed out of current speakers because the “redesign game is expensive.” But if price hikes appear permanent and speaker designers worry about the availability of neodymium magnets, “then I'm just not going to design it in,” he said. Speaker companies will either pass along cost increases or eat them, but they have a timeframe in mind for prices to settle down, or “they'll restructure pricing,” he said. “It’s exactly like a currency fluctuation,” he said.

Designing without neodymium will be harder for some products than others, Kantor said, adding that neodymium’s advantage is primarily weight more than size. Neodymium magnets are a smaller percentage of a larger driver like a woofer, so going from 10 to 12 pounds doesn’t have much of an effect on the overall design and companies can easily shift to a heavier ceramic magnet without affecting sound quality, he said. A magnet is a greater proportion of a tweeter so keeping the weight lighter is critical to the design. It’s even more important in a headphone, he noted. “If I have a tweeter in a headphone and it goes from half an ounce [with a neodymium magnet] to 2 ounces using another material, that’s a big difference,” he said.

For headphone maker Audio-Technica, prices have risen more than 30 percent and will continue rising for the foreseeable future, said Kurt Van Scoy, product manager for consumer and wired products. Van Scoy said neodymium is the “heart of the drivers and capsules” for the company’s main headphone and microphone lines and without it, the product won’t function as efficiently. It’s an unprecedented situation for Audio-Technica, he said. “We have seen no other raw material increases like this, nor have we experienced anything comparable in our history,” Van Scoy said. The price increases will be absorbed by the company’s suppliers, factories and Audio-Technica, and the company will “pass on price increases as needed when the increases exceed certain financial levels,” he said. For now, the policy is to hold prices steady for the fiscal year “if at all possible,” he said.

In addition to raw materials price rises in China, speaker manufacturers are also dealing with escalating labor rates. Chris Byrne, president of NHT, said when his company began producing speakers in China in 1998, the average wage was a little less than 200 RMB per month. This year it was 1,300 RMB, he said. A factory owner recently told Byrne that because workers are job-hopping in a worker-friendly job market, it has become an issue for factories to keep experienced workers and he’s often paying 4,000-5,000 RMB per month now “to get things done.” Combine labor rates with commodity increases and “the whole chain is limping right now,” Byrne said. NHT has coped by adopting an online sales model and eliminating reps, accounting and sales departments. Other companies, he said, are guising 10 percent sales hikes as new model introductions. At today’s exchange rate, 6.8 yuan (RMB) equals $1.00.

Harary cited one company that “changed all their model numbers” last year and raised prices 10-20 percent. “It had no impact on sales,” he said. “I'm not sure those four remaining people still buying loudspeakers won’t buy them if they're $20 more,” he said ironically. Budget-priced home-theater-in-a-box packages are a different story, and manufacturers will have no choice but to raise prices, he said. “The financial impact is going to be significant when you're talking about paying 10 times the price of a tweeter or midrange magnet today than you did a year or two ago,” said Harary. Totals add up quickly, especially for companies multiplying the increase with five-speaker HTiB systems, he said. “When a $299 package becomes $399, and the customer only spent $299 because he was willing to spend 20 percent of what he spent for a TV set, I don’t think those customers are willing to change their formulas,” Harary said. That’s going to put pressure on companies in the HTiB category either to make more efficient products or to take costs out, “make cheaper speakers,” and “hope the customers don’t notice,” he said.

Samsung and Sony, two high-volume manufacturers of home-theater-in-a-box systems, along with Best Buy, which sells them, all declined to comment. The same was true for Bose, Definitive Technology, Russound, Polk and Speakercraft. Home Entertainment Source and Brand Source also declined comment, citing their need to concentrate on preparations for their fall convention. Home Technology Specialists of America president Richard Glikes said he wasn’t aware of any speaker price increases resulting from neodymium price hikes. Efforts to reach Chinese manufacturing and government officials were unsuccessful.

For the most part, the industry hasn’t seen the impact of neodymium price increases at retail yet, said Sandy Gross, president of mid-priced speaker company Golden Ear Technology. “It all depends on when products were costed and designed,” Gross said. Products designed and costed six months ago would account for some of the pricing increase in materials, but most companies so far “have absorbed it,” he said. Golden Ear is “now looking at various parts of the product line to decide when and if to raise prices,” he added.

Paradigm, which rolled out a new speaker series this month, instituted a “small price increase” in some models ranging from $20 to $50 apiece, said Mark Aling, director of marketing. Rising shipping costs and raw materials costs were contributors to the price hike, Aling said. All of Paradigm’s models use neodymium magnets to secure grilles to the speaker baffle, and the surround and center-channel models incorporate neodymium magnets in the tweeters, he said. Aling said neodymium prices have jumped 400 percent since March but they have stabilized recently “without the WTO getting involved,” he said. Although there is a push within the company to “adjust” the magnet material, Paradigm plans to stick with neo for now, he said.

KEF America’s “deep R&D and manufacturing capabilities” will allow the company to “quickly evolve and provide solutions” as it adapts to “any change in trends, technologies or situations,” said Stephanie Scola, marketing manager. The current situation with neodymium “is no different,” she said.

In an age when Americans live for the Black Friday deal all year long, raw materials price changes and labor rates in China could change the landscape, said Byrne of NHT. “We're going to have to pay what the product is actually worth instead of the great deals we've all gotten in this country for the past 10 years,” Byrne said. The days of delivering a seven-coat black-lacquer cabinet to a consumer for $150 “are over so we're going to have to get more clever about our designs,” he said. He envisioned a return to times like the early 90s “when we had American manufacturing and you had to come up with low-cost ways of doing things that were attractive enough to appeal to people,” he said.

Harary of GEM CE Consulting said he “would be surprised if there weren’t a 5 or more percent increase having to be taken by most brands in the next 12 months.” Vendors he’s close to in China are dealing with 12-17 percent cost increases, and many work on 7 percent margins and two percent profit, he said. “The question becomes, how much of that can they absorb through efficiencies in their business” he added. Then it becomes an issue of how much they're willing to pass along and how much brands are willing to pass along “because consumers are used to paying less for CE products, not more,” he said. “China has been exporting inflation over the past few years and now it’s going to come to China,” Harary said. “Once it does, it’s going to affect the cost of our products.”