At Tesla’s investor day this week, the electric vehicle maker announced its next generation of permanent magnet motors would no longer use rare earths.
Markets reacted swiftly. Shares of Chinese rare earth miners plunged as much as 10%. Shares of Lynas, the largest non-Chinese producer of the critical metals, dropped some 11% when Australian markets opened. MP Materials, which mines rare earths from its Mountain Pass site in California, also crashed about 11% in response.
“Did we miss something?” MP wrote on Twitter, adding a yawning emoji. “Motor design has & always will involve trade-offs...We’ll bet an Optimus that automakers will buy much more rare earths in the future.”
Rare earths comprise a group of 17 metals crucial for many high-tech applications, including car motors, wind turbines, missiles, and fighter jets. The US and its allies see China’s dominance of global rare earth supply chains as a major national security risk.
There are several reasons to suggest markets are overreacting to Tesla’s rare earths announcement.
Tesla is a small sliver of rare earth magnet demand
For one, Tesla represents only a small sliver of overall global demand for permanent rare earth magnets. EV motors make up 12% of global rare earth permanent magnet consumption, and of that, Tesla was responsible for about 15% to 20%, according to the metals and minerals advisory firm Adamas Intelligence.
Assuming Tesla can commercialize and scale its new rare-earths-free motors soon, the global rare earths magnet market would “lose a mere 2% to 3% of demand in the near-term, and maximum 3% to 4% over the long-term assuming Tesla maintains its EV market leadership,” Adamas Intelligence wrote in a note this week.
No one has commercialized a rare earth magnet alternative. Yet.
Tesla’s share of rare earth magnets demand aside, so far, no company has successfully developed and deployed an alternative that is competitive with neodymium-iron-boron (NdFeB) magnets, the dominant form of permanent rare earth magnets.
Rare earth permanent magnets offer superior size and energy efficiency that rare-earths-free alternatives have yet to match. Ferrite magnets, made of iron oxide, are cheaper alternatives. But they are heavier and larger in size, and have less temperature resistance than NdFeB magnets, making them less efficient and imposing additional costs on the EV’s battery.
Another drawback of non-rare-earth magnets is lower torque, the force that produces rotation, according to the Belgium-based Rare Earth Industry Association.
That said, various companies are working to develop competitive rare-earths-free magnets. One such firm is Minneapolis-based Niron Magnetics, which in November received a $17.5 million grant from the US Department of Energy to to fund commercial partnerships and pilot production of its iron and nitrogen magnet.
For now, global demand for rare earth magnets is expected to triple by 2035 while production will only double, according to Adamas.
“In relation to the magnitude of the expected supply gap, a 3% to 4% drop in demand by 2035 would go virtually unnoticed,” Adamas noted.