Iron in the presence of water reacts with oxygen to form a mixture of iron oxides called rust. Rust differs from iron in a number of important ways. Unlike pure iron, rust is only weakly magnetic.
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Rust doesn't refer to any one specific compound; it's actually composed of three different iron oxides, often together with impurities. While iron is ferromagnetic, rust is only weakly magnetic. As the iron in a magnet rusts, the parts of the magnet that have rusted will only be weakly magnetic at best.
Not all magnets are composed solely of iron; there are a wide variety of magnets made from different alloys. Ceramic or ferrite magnets, for example, are made of iron oxide and strontium carbonate, while alnico magnets are made of aluminium, nickel, cobalt and iron. Some types of magnets are more resistant to corrosion than others. According to The Magnet Guide, ceramic magnets are highly corrosion resistant and do not need coating, while neodymium iron boron magnets are much more susceptible to corrosion.
Rust will decrease the strength of a magnet as it eats through the magnet; coating iron magnets in corrosion-proof material or choosing magnets made from a different material, however, will help to prevent rust formation. Nickel plating and epoxy coating are two types of coatings that prevent water and oxygen from coming in contact with the metal surface. In general, magnets will attract materials made of rust poorly, if at all, because rust is only a weakly magnetic material.
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