Last week we witnessed a dramatic turn for companies tied to rare earths elements (REEs).
Australian producer Lynas Rare Earths [ASX:LYC] fell 11% last Friday, while Arafura Rare Earths [ASX:ARU] shed around 10%.
Chinese producers, accounting for around 90% of global production, also fell hard.
So, what drove the commodity-wide sell-off?
At its much anticipated ‘investor day’ presentation in Texas, Tesla revealed that it was looking to remove rare earth metals from its next-generation vehicles.
The market viewed this as a big deal in terms of the outlook for REEs…
You see, neodymium and praseodymium (NdPr) are two REEs used in permanent magnets for electric vehicles (EVs).
At first glance, Tesla’s announcement puts a major dent in the demand outlook.
But dig a little deeper, and things may not be so bad for this poorly understood commodity.
I’ll get to that point in a moment.
But first up, what’s at the root of Tesla’s change in strategy?
The answer…cost cutting.
According to Tesla, they’re looking to reduce manufacturing costs by up to 50% while also scaling up its global vehicle sales from 1.3 million to 20 million vehicles by 2030.
It’s all part of the grand plan to get EVs into the hands of the mass consumer.
However, the company was light on details…engineers outside Tesla ranks have little idea how the company is set to revolutionise its EV motor without rare earths magnets.
You see, NdPr magnets are the superior choice when it comes to EV production.
They offer significant performance benefits, enabling the development of compact, torque- and power-dense electric motors.
According to some experts, though, replacing rare earth magnets from its next-generation fleet will inevitably compromise efficiency.
In EV design, there’s a fine line between cost and performance.
But Tesla looks to be shifting dramatically toward the cost saving side…slashing production expenditure to deliver low-cost EV’s for the mass market.
It’s even looking to skip the critical step of building a prototype model in the name of saving cash and fast-tracking its newest model into production.
There’s valid reason car manufacturers build prototypes before going into mass production, and it goes beyond glossy magazines and marketing…
It’s a critical step that allows engineers to iron-out faults under normal driving conditions.
Any major failings could have a profound impact on the company’s long-term outlook…its PR could be shattered thanks to overreaching on cost cutting and expediating production.
That would pave the way for other manufacturers to capitalise on Tesla’s potential flaws and claw back market share in the EV mass-market race.
But with Tesla’s stock price capitulating almost 75% from its peak in November 2021 to its low in January 2023, the company is desperate to pitch something new…
So, how could Tesla break into the mass market without REEs?
Some experts suggest the most likely alternative to NdPr magnets is one derived from ferrite…this uses mostly iron oxide with barium and strontium additives.
Some car manufacturers are already using the technology with mixed success.
The advantage is that iron oxide is incredibly abundant and cheap compared to rare earths.
But reducing manufacturing costs could have a major impact on efficiency.
According to Adamas Intelligence (emphasis added):
‘While it’s been demonstrated that a ferrite-powered PMSM can match or exceed the performance of an NdFeB-powered [Rare Earth] alternative across one or more parameters, this performance comes with a significant weight or efficiency penalty that has historically made the switch unattractive.
‘For example, in one of Proterial’s new motor designs, it simulated an EV traction motor with ferrite magnets that matched the output and max rotation speed of a comparable PMSM containing NdFeB magnets but is 30% heavier — a “massive” weight penalty.’
Essentially, ferrite magnets’ extra weight penalty translates into shorter distances between each charge.
Historically, that’s been one of the main sticking points for EV uptake over conventional cars.
Particularly in Australia or the US, where travelling vast distances becomes an issue, or as commute times to the office lengthen through urban development.
Rare earth magnets have been the breakthrough technology that has lifted EVs into the same league as conventional cars…
Where the recharge distances could match the refilling distance of a gasoline vehicle.
No doubt Tesla is betting big on its new strategy, but will it pay off?
Who knows.
We’ll have to wait and see whether Tesla engineers have a secret ingredient in their arsenal that does away with NdPr magnet batteries without major weight penalties.
If that’s the case, it would be a major breakthrough that blindsided industry experts, researchers, and scientists across the globe.
Unlikely, but possible.
Which is why most experts believe Tesla is simply rebranding the ferrite technology, with perhaps some slight improvements.
We’ll wait and see.
So is this the time to exit the rare earth space?
Not by a long shot!
Tesla consists of just a small portion of the overall rare earth market…
As the research firm Adamas Intelligence highlights, Tesla’s overall contribution to global rare earth magnet demand was just 2–3% in 2022.
Further, it expects overall REE demand to triple into 2035…that’s while production is expected to double (at best).
No doubt EVs will remain an important contributor to future demand.
But the story behind REEs goes far deeper than EVs.
Rare earth-based magnets are a critical component of wind turbines, approximately one tonne of rare earth material is used in a single turbine.
For nations like China, turbines are set to play a central role in energy security.
It’s already the nation’s third-largest source of energy…
According to the country’s National Energy Administration, China operates half the world’s offshore wind capacity with a total of 26 gigawatts of a total of 54 gigawatts worldwide.
But replacing oil, gas, and coal imports with its own wind generating power goes much further than addressing the environmental agenda…it’s a matter of national security.
It all but guarantees massive demand for rare earths as China builds on its existing turbine capacity.
But mounting geopolitical tension will also play a major role in driving future demand for REEs…
According to some military sources, around 3,000 items of US military equipment require rare earths, including components on aircraft, satellites, missiles, warships, submarines, and radar equipment.
As the drums of war continue to roar louder each month, nations are leveraging up their GDP allocations to military spending.
It’s what makes REEs a critical metal for national security.
As Reuters reports, the US military is alarmed by China’s dominance in global rare earth supply, hence the reason the army is attempting to secure domestic supplies (emphasis added):
‘The U.S. Army plans to fund construction of rare earths processing facilities, part of an urgent push by Washington to secure domestic supply of the minerals used to make military weapons and electronics, according to a government document seen by Reuters.
‘The move would mark the first financial investment by the U.S. military into commercial-scale rare earths production since World War Two’s Manhattan Project built the first atomic bomb.’
With China holding around 90% of global supply, Australian and North American producers are strategically positioned to provide the West with REEs to feed the healthcare, defence, manufacturing, and technology industries.
With the sell-off well underway in rare earth producers…an opportunity presents.
But this will be a true contrarian investment.
Opportunities like this will become exceedingly rare as momentum for critical metals builds.
Tesla’s shock announcement for the REE industry is one of those scarce openings to pick up a producer holding a key commodity for the future…but trading at a significant discount.
Keeping your eyes firmly fixed on the long-term demand and supply fundamentals will be your key toward capitalising on rare breaks like this.
Until next time, happy investing.
Regards,
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James Cooper,
Editor, The Daily Reckoning Australia
