Why Lynas is going up and will continue to go up, page-6

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"Rare earth magnets keep their strong attraction despite Tesla’s jawboning

6 HOURS AGO

BARRY FITZGERALD

Independent Journalist

There wasn’t any discussion at Tesla’s investor day on March 1 about steering wheels in the Model Y SUV coming off while herbing down the highway. Talk about hands-free driving.

Okay, there have been “only” two reported incidents. Still, US auto safety regulators have opened an investigation into the incidents which trade reports reckon comes down to a missing bolt, one that attaches the wheel to the steering column no less.

Friction alone was holding the problem steering wheels in place. But once some torque was applied, something Teslas have plenty of, off they popped.

While there was no discussion on the issue at the investor day, Tesla did make a big splash about its plan to move away from using rare earth magnets in its powertrains.

The disclosure pulled the rug on the rare earths stocks, most notably market leader Lynas (LYC). It shares have fallen 23% since, wiping $1.77 billion from its market cap.

The general market malaise is also a factor in a market value crunch which has left Lynas with a somewhat skinnier market cap of $5.8 billion.

Weakness in the key magnet rare earths (down from $US124/kg in July last year to $US87/kg in December, but up from $US35.90/kg in December 2019) hasn’t helped the sector either.

There has been plenty of discussion since about what Tesla’s move means. Experts like Adamas Intelligence reckon that should Tesla drop rare earth magnets across its fleet, the global market for the stuff would be 3-4% less over the long term.

That assumes Tesla maintains its current EV market leadership.

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

It is assumed Tesla’s move involves a switch to ferrite magnets. They are cheaper but come with weight and efficiency penalties.

Take in all that and it seems likely that Tesla’s rare earths “bombshell” isn’t really a bombshell at all, and that the sell-off in the rare earths stocks has been overdone.

Tesla said as much when it noted at the investor briefing that as the world transitions to clean energy, demand for “rare earths is really increasing dramatically”.

The seemingly overblown reaction to Tesla’s move to a bulkier and less efficient form of a permanent magnet – assuming they haven’t re-invented the wheel – means that the rare earth producers, developers and explorers are better value than they were.

The big thematic that demand for rare earths of the permanent magnet type will continue to surge, and that the western world’s reliance on supplies from China needs to be broken, has not gone away.

Following on from Joe Biden’s Inflation Reduction Act, the European Union has just ushered in its Critical Raw Materials Act (CRMA) to ensure it has the metals required for the energy transition and its defence industry.

COVID and the war in Ukraine has taught everyone about the vulnerability of supply chains. The EU has a current 98%, 93% and 97% dependency on China for rare earths, magnesium and lithium respectively.

Like the IRA, the CRMA will involve tax breaks of all sorts to increase Europe’s mine supply to 10% of its requirements by 2030, and 40% of its processing requirements. A central purchasing agency, and speeding up permitting, is part of the plan.

Good luck with all that. It is an impossible task for the EU. But the will (and tax breaks) are there, as they are in the US. Decarbonisation and decoupling from Chinese supply lines is the new mantra, which requires a multi-decade effort.

In comparison, the current market concerns around the global banking system is a short-term blip.