Seagate Blames A “Bubble” In Rare Earth Prices for Causing A Margin Squeeze

(This is an excerpt from an article I originally published on Seeking Alpha. Click here to read the entire piece.)

For some time now, rare earth supply, demand, and prices have been hot topics of discussion and debate. While these elements are critical components in many high-tech products, they usually represent a very small part of overall product costs. While the Japanese have clearly been scrambling to reduce their dependence on Chinese exports and to otherwise secure greater supplies, I have never heard a company complain that soaring rare earth prices were materially hurting profit margins…until now.

Seagate Technology (STX), a manufacturer of hard drives and provider of storage solutions, warned during its earnings report on July 20 that rare earth prices are starting to squeeze its profit margins. In particular, soaring prices over the last two months or so have hit the company hard.

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If Seagate is specifically relying on Molycorp to eventually relieve the supply crunch in the near future, they may be disappointed. On July 11, BBC News quoted Jim Sims from Molycorp claiming that “…as China’s exports are being restricted, we are looking at outright shortages of rare earths, probably this year and next…”

Moreover, I have cited other references in a previous post challenging claims that rare earths will be plentiful as early as 2013 (see “Chinese Academic’s Rare Earth Forecasts at Odds With Industry Experts“). In other words, the “bubble” in rare earth prices will likely last a lot longer than consumers like Seagate expect (or at least hope!).

Be careful out there!

Full disclosure: net long MCP

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