With the scheme notified this week, it’s clear what the government is trying to do—create a midstream industry that uses refined rare earth oxides to make magnets for sectors such as defence, electronics, renewable energy, and electric vehicles.
But how will the incentive package actually play out in a complex web of stakeholders that include state-run India Rare Earths Ltd (IREL)?
Mint explains the goal of the scheme, the roles of various stakeholders, and how incentives will be awarded.
What kind of rare earth magnets is the government looking to incentivise?
Rare earth magnets are exceptionally powerful permanent magnets made from alloys of rare-earth elements. They are critical to modern technology as their unmatched strength-to-size ratio enables the high efficiency and extreme miniaturization of electric vehicle motors, wind turbines, and portable electronics. China accounts for about 60% of the world’s rare earth mining, and 90% of processing capacity.
According to a 15 December notification by the ministry of heavy industries, the government will support the manufacturing of sintered neodymium-iron-boron (NdFeB) magnets—the strongest permanent magnets commercially available.
Broadly, the manufacturing process has three steps:
- upstream mining of rare earth ores and converting them into high-purity rare earth oxides;
- the midstream process of converting oxides to metals, metals to alloys, and alloys to magnets; and
- the downstream process of fashioning them for various uses.
The government said India has upstream capabilities in mining, separation and oxide refining, but almost no industrial-scale midstream capabilities, forcing Indian manufacturers to import all rare earth magnets they need. The goal is for India to be in a position to make 6,000 tonnes of such magnets in a year, the notification said.
Rare earth magnets are used in crucial, strategic sectors such as defence, electronics, renewable energy and automobiles, including electric vehicles. For instance, automobiles use these magnets in traction motors. They are also used in offshore wind turbines.
How does IREL fit into the equation?
IREL has a unique position in the sector as the only Indian company that mines rare earth ores and refines them into oxides. It will play a standout role in this scheme, too.
It currently has the capacity to make about 400 tonnes of rare earth oxides a year, which can be used to make about 1,200 tonnes of magnets (the thumb rule is that one unit of rare earth oxides can on average be used to make three units of rare earth magnets). IREL also has a stockpile of about 500 tonnes of rare earth oxides, meaning it can support the manufacturing of around 1,500 tonnes of magnets.
The government will select five beneficiaries under the incentive scheme, including through transparent bidding, to allocate magnet-making capacity. Each applicant can bid for 600-1,200 tonnes per annum of capacity, and must submit technical and financial bids.
The three lowest bidders, meaning those that seek the lowest prices for magnet sales incentives, will receive an “assured limited supply” of rare earth oxide from IREL, the notification said. The lowest bidder will get 200 tonnes, the second-lowest 167 tonnes, and the third-lowest 133 tonnes.
How much support can magnet makers expect from the government?
Government support comes in two parts—a capital subsidy of ₹750 crore to set up the five plants, and the rest through sales-linked incentives. The sales incentive will be calculated as the kilos of magnets sold multiplied by the bidder’s quoted incentive (price per kilo) in its financial bid, capped at ₹2,150 per kilo. The sales-linked incentive will be capped at 40% of the net sales turnover of these magnets.
The plants must be set up in two years, and sales-linked sops will be available for five years after that, the government said. It added that if sales begin before the two-year gestation period ends, they will also be eligible for incentives “over and above the five-year duration”. These sops will be disbursed half-yearly or annually.
The government has also capped sales-linked sops proportionate to the manufacturing capacity allotted. For instance, if a bidder is allocated 600 tonnes capacity, they will be eligible for ₹640 crore worth of sales-linked incentives. Similarly, bidders with 700 tonnes, 800 tonnes, 900 tonnes and 1,000 tonnes will be eligible for a maximum of ₹753 crore, ₹860 crore, ₹968 crore, and ₹1,075 crore respectively.
For bidders with an allocated capacity of 1,100 tonnes and 1,200 tonnes, the incentive will be capped at ₹1,183 crore and ₹1,290 crore, respectively. There are similar caps on the capital subsidy for setting up the plant, with bidders getting ₹75 crore for 600 tonnes of capacity, rising proportionately to ₹150 crore for 1,100-1,200 tonnes of capacity.
What do prospective bidders need to do?
A bidder under this scheme can be a company, an international group, or even a consortium. More detailed requirements will be revealed in the request for proposal (RFP), which will be floated later, the government said. Each bidder must submit a technical bid that includes a detailed project report (DPR), and a financial bid that mentions the incentive it’s seeking and the price at which it will sell the magnets. This will be the selling price regardless of whether the oxides are sourced from IREL or elsewhere.
All bidders must also submit a performance bank guarantee of ₹20-40 crore based on the capacity they will develop.
The government has also said beneficiaries must invest ₹300-600 crore in two years, depending on the capacity they have been allocated.
Mint reported on 2 November that foreign rare earth oxide suppliers Lynas, Iluka and Rainbow have shown interest in the scheme.
What’s the bigger picture here?
India stands at a crossroads when it comes to rare earths and their products. On one hand, the government is supporting the local manufacturing of these magnets to strengthen domestic supply chains amid global uncertainties. On the other, it has called on the industry to invest in R&D to find solutions that bypass the need for rare earth magnets.
Abhay Tilak, an economist in Pune who is also director of the Indian School of Political Economy, said this two-pronged approach is in fact a short-term and long-term solution rolled into one. The incentive scheme is a short-term solution for supply chains to find their footing amid China’s disruptions, while moving away from rare earth magnets is the long-term plan to counter China’s dominance and minimize the huge environmental impact of making these magnets.
While experts have said new technologies could bypass rare earth magnets in future, Mrunali Tembhurne, associate fellow at The Energy and Resources Institute (Teri), told Mint when the incentive package was announced that these alternatives would complement rather than replace the technology that uses rare earth magnets.
“While manufacturers worldwide are evaluating the use of rare-earth-free technologies such as ferrite motors in electric vehicles, these will coexist with, rather than fully replace, rare-earth-based products that are critical in multiple sectors, at least in the near to medium term,” she said.
