Sunday, July 24, 2011

Rare Earth Mile Marker

It has become clear to us that readers remember only the last thing that they were exposed to.  There is a natural human instinct that places heavier weightings on immediate information.  This explains the phenomenon of  using media to control mass perception.

This site has attempted to cover the rare earth element bull market with objectivity and foresight.  We offer an archive and search tools for readers who wish to go back and study our past statements.  We have long said that we were looking for mile markers on the bull market journey.  One such marker was passed on Wednesday July 20th.

Seagate Technology NYSE:STX reported earnings for the quarter and fiscal year end.  The numbers were acceptable and beat on some lines.  With annual sales of roughly $11,000,000,000 in the computer hard drive business why would the executives take a significant chunk of time on the call to discuss rare earth elements?  Well, when there is one raw component that is having a 200bps impact on operating margins it needs to be addressed.

Neodymium is used in two parts of the hard disk manufacturing process.  Simply put, this process can be compared to the permanent magnet business previously discussed on this site.  Here is a chart of the price rise that Seagate's suppliers are dealing with:

We estimate that Seagate would use roughly 800tn of Neodymium Oxide per year.  This is only a six month chart of the price rise.  While CEO Steve Luczo expects this to be a "temporary" issue, he did have this to say on the company's conference call:

".....Seagate has historically been able to absorb these cost increases and insulate our customers. However, the recent dramatic increase in the cost of rare earth elements, combined with a pre-existing upward trend for a broad base of other commodities, far exceeds our ability to find offsetting cost reductions. While we are exploring opportunities to reduce the content of certain rare earth elements that are used in the manufacture of hard disk drive components, we will be discussing with our customers, passing through what we hope are temporary surcharges related to upstream earth-based commodities."

Where will Seagate find a solution for this "temporary" problem?  The reason we are eager to hear their answer to that question is that every windmill that green power freaks demand we build also requires over 600lbs of Neodymium.  How about the stylish and enviro-conscious Toyota Prius?  Where will the 70lbs needed for each one of those come from?

Maybe the United States Congress will issue a decree that China play fair with their supplies of these elements.  Once they are done steering the country away from bankruptcy by taking more loans they can deal with this issue.  After all, we have been conditioned to look toward government for the solution to all of our problems.

1 comment:

Romocop said...

China better be nice to us! Or else....