Tesla's next-gen EV motor won't use rare earths: Lynas, Arafura shares tumble

The environmental and health risks associated with producing rare earth elements has been a major point of controversy but Tesla aims to make it a thing of the past.

During its Investor Day event on Thursday, Tesla announced that its next-generation motors would use a permanent magnet motor that require zero rare earths.

This triggered a sharp 4-7% selloff for local rare earth miners including Lynas (ASX: LYC), Arafura (ASX: ARU), Hastings Technology Metals (ASX: HAS) and Dreadnought Resources (ASX: DRE).

Tesla set to abandon rare earths

Tesla has already steadily reduced the rare earth materials required to build its EV systems by approximately 25% since 2017.

At present, the Model Y requires three types of rare earths, the first being approximately 500 grams and the other two being 10 grams each. The presentation did not specify which ones but elements like neodymium, cerium, dysprosium and terbium tend to be the most common ones for EVs.

The future of Tesla seeks to take that rare earth consumption to zero.

"As the world transitions to clean energy, demand for rare earth is increasing dramatically. Not only is it going to be a little hard to meet that demand but mining that rare earth has environmental and health risks. We want to do even better than this," said Tesla's VP of Powertrain Engineering Colin Campbell

"We have designed our next drive unit, which uses a permanent magnet motor which does not use any rare earth materials at all."

Volatile times

A heavyweight name like Lynas kicked off Friday on a rather choppy note:

• Open: +1.9% to $7.95

• Session low: -2.6% to $7.60 (at 10:15 am AEDT)

• Current: +0.5% to $7.84 (at 11:30 am AEDT)

Understandably, the Tesla news is difficult to digest and only time will tell whether or not it has an impact on rare earth prices.

Signal or noise

Tesla has a massive foothold in the EV market, with a market share of approximately 65.4% in 2022, according to Experian.

From a glass-half-full perspective, EV rivals might not have the technological capabilities to take the same zero rare earths pathway. While the half-empty perspective might acknowledge that as a massive chunk of rare earth demand that will soon disappear from the market.

Outside of EVs, rare earths has applications for advanced technologies used in sectors such as healthcare, aerospace and defense, consumer electronics and industrials. Tesla only takes up a fraction of global consumption.

Did you know that Lockheed Martin's F-35 stealth fighter uses 920 pounds of rare earths per plane?

Regardless of the supply and demand implications, Tesla is such a powerful brand and pioneer in the EV space that its decision to use zero rare earths is bound to cause a shakeup for rare earth stocks.