(Repeats Wednseday's story with no changes to text)
By Andy Home
LONDON, March 8 (Reuters) - Tesla will eliminate the use of rare earths in its next-generation electric vehicles (EV).
The big reveal at the company's investor day last week caused a sell-off in shares of both Chinese and Western producers. Australia's Lynas Rare Earths Ltd. slumped 6.8% on the news and has fallen further since.
It hasn't helped the price of rare earths either, accentuating a sharp slide that began in February.
Permanent magnets, using rare earths such as neodymium and praseodymium, or the more manageable NdPr for short, have become standard in the EV sector.
But Tesla and its peers are struggling with the supply-chain dominance of China, the world's largest producer and processor, and a history of extreme price volatility, most recently at the start of 2022.
All would like to engineer rare earths out of their electric motors but it's a slow, evolving process as the industry experiments with new configurations.
Tesla's announcement is significant for what it says about the direction of travel but won't make much of a dent in a market that is struggling to generate enough supply to meet surging demand.
BACK TO THE FUTURE
Tesla has been here before.
The EV pioneer used an induction motor rather than a permanent magnet (PM) motor in its original Model S and X iterations but switched with the release of the Model 3 in 2017, according to the IDTechEx research consultancy.
It's going to stick with a PM motor but redesign it to exclude rare earths. It was coy on the details but is most likely looking at a ferrite-based alternative, IDTechEx said.
Rare earths consultancy Adamas Intelligence agrees, noting that ferrite magnets are "a proven concept", already used by General Motors in its 2016 Chevy Volt.
However, while they can match a neodymium-iron-boron (NdFeB)magnet across one or more parameters, "this performance comes with a significant weight or efficiency penalty that has historically made the switch unattractive," it warned.
Which is not going to stop Tesla and others experimenting with alternatives.
Audi and Mercedes are opting for an induction motor in their EV series, while BMW and Renault have adopted a wound motor configuration, according to IDTechEx.
But the sector still remains heavily reliant on rare earths and permanent magnets, which accounted for 80% of the EV market last year, it said.
ACCELERATING DEMAND
The EV revolution is accelerating as both Europe and the United States pour money into decarbonisation, which means the sector is going to remain a key driver of rare earths demand.
But electric vehicles are far from being the only user of permanent magnets. They are ubiquitous, powering everything from hard drives to smart phones to wind turbines, another sector that is experiencing heavy government-led investment.
Even if Tesla can deliver on its rare-earths-free ambitions, the impact on NdFeB magnet demand is going to be limited, according to Adamas.
It estimates that EV motors represent around 12% of global magnet consumption with Tesla accounting for 15-20% of the sector's demand.
"The global NdFeB market stands to 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 estimates.
The consultancy has forecast demand for rare earths such as NdPr, terbium and dysprosium to grow at a compound annual rate of 8.6% through 2035, outpacing supply growth of 5.4%. ("Rare Earth Magnet Market Outlook", April 2022)
The outlook is one of deepening supply deficits, that for NdPr oxides is forecast to be 68,000 tonnes by 2035, equivalent to China's production in 2021.
This is part and parcel of the broader EV metals narrative with lithium, nickel and copper all in danger of falling short of green demand growth.
The common outcome is volatile and elevated pricing.
RARE EARTHS ROLLER-COASTER
Rare earths have been on a price roller-coaster over the last three years.
Neodymium, for example, rocketed up from 203,000 yuan per tonne in July 2021 to over 1.5 million yuan in early 2022 amid an acute supply squeeze caused in part by COVID interruptions to raw material flows from Myanmar to China.
It has since slumped back to a current 815,000 yuan, according to Chinese data provider Shanghai Metal Market.
That, however, is still a lot higher than it was a couple of years ago, attesting to the strength of underlying demand in a year when the consumer electronics sector struggled in both the West and China.
Pricing remains beholden to China, which is not only the world's largest producer of rare earths but also the largest user, making most of the world's permanent magnets.
It's an opaque market with supply determined by government production quotas and internal dynamics characterised by frequent mismatches with demand.
There is also the lingering threat that China could weaponise its rare earths supply if relations with the West deteriorate.
It did so in 2010 by cutting off exports to Japan in a dispute over the status of the islands in the East China Sea called Senkaku by the Japanese and Diaoyu by the Chinese.
REDUCING DEPENDENCE
Western companies have been trying to reduce their dependence on Chinese rare earths ever since.
Tesla, which says it has already cut its rare earth usage by 25%, is part of a much broader attempt to move away from what is a particularly problematic supply chain.
Western governments are doing the same. Lynas has just announced a A$200 million ($134 million) investment package from Japan Australia Rare Earths, jointly owned by state-owned Japan Organization for Metals and Energy Security (JOGMEC) and Sojitz Corp.
The company already has contracts with the U.S. Department of Defense to build rare earth processing capacity in Texas.
Western supply is going to grow thanks to government largesse in both the United States and Europe, which is rushing to catch up in the critical minerals race.
For now, though, this is a market that remains dominated by China and characterised by price wildness. That's not going to change with Tesla's drive to eliminate the stuff from its next model.
($1 = 6.9693 Chinese yuan termini)
The opinions expressed here are those of the author, a columnist for Reuters.
