Some Chinese producers of rare-earth magnets are seeking to use this month’s expiry of a key patent held by Hitachi Metals Ltd. (5486) to expand exports of the micro magnets used in products from motors to smartphones.

The expiry of a 17-year-old patent that defines the structure of such magnets paves the way for previously blocked Chinese producers to sell to U.S. customers, said Sun Baoyu, chairman of Shenyang General Magnetic Co. It’s formed an alliance with six Chinese producers to promote their products and fight Hitachi over other patents, that the Japanese company says largely prevent rivals from making magnets.

“Hitachi’s whole patent package’s base is this ingredient patent,” said Li Weifeng, a Shanghai-based analyst with Everbright Securities Co. It is a “very basic” patent for the magnets, he said.

The end of the patent will pit the seven producers in the alliance and potentially others who try to tap into the market against Hitachi and eight Chinese companies that have paid for the right to make and ship the magnet. An increase in exporters of the magnets could cut prices of the product used inApple Inc. (AAPL)’s iPhones and Toyota Motor Corp. (7203) hybrid-electric cars.

Hitachi holds more than 600 patents for rare-earth magnets globally, some of which it acquired after taking over Sumitomo Special Metals Co. in the 2000s, said spokesman Akio Minami.

“The company considers it’s almost impossible for other companies to commercially manufacture the magnets if avoiding all of our patent network,” said Minami, “Since we don’t know details of action by the seven Chinese companies, we refrain from making comments on this matter.”

China Overcapacity

Magnet makers in China are struggling with overcapacity after an earlier price boom spurred a flood of investments. The nation produces about 100,000 metric tons of sintered rare-earth magnets annually, compared with almost 300,000 tons of capacity, according to Everbright’s Li.

Japanese companies hold most of the world’s rare-earth magnet patents, while China produces about 90 percent of global supply, Li said. Chinese exports of the magnets were 18,800 tons last year.

“Hitachi and those who have entered the market would worry about a flood of Chinese competitors,” said Le Yukun, head of metals and mining with BOC International Holdings Ltd., Bank of China Ltd.’s investment banking unit. “Prices will fall if the Chinese alliance wins.”

The expired U.S. patent 5,654,651 covers magnets with neodymium, a rare earth element, and cobalt, according to Sun. The Chinese alliance plans to sue Hitachi in the U.S. over several other patents that cover production, he said.

Important Markets

“Japan and U.S. are the most important overseas markets for magnets,” Shenyang General’s Sun said, adding that clients are concerned about Hitachi’s patents.

Beijing Zhongke Sanhuan High-Tech Co. (000970) and Ningbo Yunsheng Group Co. (600366), China’s two largest producers of rare-earth magnets, are among the eight Chinese companies that have paid to use Hitachi’s patents. Zhongke Sanhuan is licensed to use more than 400 Hitachi patents related to sintered rare-earth magnets and methods for their manufacture globally, according to a company statement on its website.

Everbright’s Li expects more trade disputes as Chinese producers seek to boost magnet exports, though he doesn’t expect they would win legal disputes against Hitachi on the remaining patents. BOC’s Le agrees Chinese producers aren’t likely to win any disputes over remaining patents.

Neodymium oxide has tumbled 80 percent to 295,000 yuan ($47,463) a ton from its record 1.48 million yuan in 2009, according to Shanghai Steelhome Information prices.

To contact Bloomberg News staff for this story: Helen Yuan in Shanghai athyuan@bloomberg.net

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.netMadelene Pearson, Andrew Hobbs