Unfazed by Tesla's comments, producers say rare earths to keep key role in EVs

This is part one of a two-part story on Tesla's decision to move away from rare earth magnets in its electric vehicle fleet. The second part looks at alternatives to rare earths and their potential environmental impacts and viability.

Rare earths' use in electric vehicles will continue despite Tesla Inc. moving away from using rare earth magnets in its powertrains to avoid future supply bottlenecks.

Shares of rare earth miners, as well as that of Tesla's rare earth magnet supplier, JL Mag Rare-Earth Co. Ltd., fell after a Tesla executive announced March 1 that the automaker's next drive unit will have a motor that does not contain any rare earth metals.

Colin Campbell, Tesla's vice president for powertrain engineering, said the new permanent magnet motor would lower costs and use "less of constrained commodities." Campbell said Tesla has already managed to shrink its use of heavy rare earths by 25% from its original motors.

"As the world transitions to clean energy, demand for rare earths is really increasing dramatically," Campbell said at the company's investor day. "And not only is it going to be a little hard to meet that demand but mining that rare earth, it has environmental and health risks."

Confidence undimmed

Shares of rare earths producers MP Materials Corp. and Lynas Rare Earths Ltd. fell more than 16% as of March 10 since the comments. Yet, producers remain confident in rare earth's use in EVs for the long term.

"Aspirational efforts to engineer alternatives highlight the extent to which demand is outpacing supply and is bullish for the sector," Matt Sloustcher, MP Materials' senior vice president for communications and policy, said in an email interview.

Adamas Intelligence sees the global demand for neodymium magnets, a type of rare earth magnet, tripling by 2035, whereas global production is expected to only double due to long lead times in bringing new rare earth oxide production online.

"There is room for different options to grow in the market," Lynas COO Pol Le Roux said in an email interview. "We remain confident in the overall advantage of [neodymium] magnets, provided end users select responsible suppliers in their supply chain."

Chinese magnet maker Beijing Zhong Ke San Huan High-Tech Co. Ltd. said March 3 on the Shenzhen Stock Exchange's investor platform that the growing EV market is large enough that one automaker's choice to move away from rare earths would not have a significant impact on the sector in the short term.

Overblown market reaction

Northland Capital Markets questioned the "unjustified overreaction" to MP Materials' stock price plunge given supply is the issue with rare earths rather than demand, with "plenty of other uses" for permanent magnets like wind turbines, radars and drones, it said in a March 2 note.

In 2022, Tesla’s overall contribution to global neodymium demand — excluding micromotors, sensors and speakers — was just 2%-3%, Adamas said in a March 2 note. Should the automaker outfit its full vehicle lineup with the new permanent magnet motor, “the global neodymium magnet market stands to lose ... a maximum 3% to 4% over the long term, assuming Tesla maintains its EV market leadership."

"In relation to the magnitude of the expected supply gap, a 3% to 4% drop in demand by 2035 would go virtually unnoticed."

No perfect alternatives

The neodymium magnet is "the most energy-efficient technology, as it creates the lightest electric motors," Le Roux said, noting that the magnet averages about $200 per Tesla, or around 0.3% of the selling price, Lynas' Le Roux said.

MP Materials' Sloustcher said motor design will always involve trade-offs. "No perfect alternatives exist, and they generally come with significant weight and efficiency penalties. [Rare earth] magnet motors are dominant because they provide the best balance of power, efficiency and cost," Sloustcher said.

A permanent magnet that is more cost-effective than rare earth permanent magnets has yet to be found, Zhong Ke San Huan said.

The most likely candidate to replace neodymium magnets in Tesla's next generation motor design appears to be ferrite, commonly used in EVs for applications such as auxiliary motors, generators and regenerative braking systems, according to Northland. However, ferrite is not typically used in EV main drive motors, which need the higher magnetic strength of neodymium magnets to generate torque for efficient performance, Northland said.

While a ferrite-powered permanent magnet synchronous motor can match the performance of a neodymium-powered alternative, it "comes with a significant weight or efficiency penalty that has historically made the switch unattractive," Adamas said.

"[Tesla's] focus when it comes to motors has long been on maximizing the cost-performance balance, which is where [neodymium magnet-powered permanent magnet synchronous motors] shine, so it is eye-opening to see the new motor concept being justified on the back of anticipated supply scarcity and 'environmental and health risks,'" Adamas added.

Tesla did not respond to multiple requests for comment for this story.

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