A couple of days ago, Seagate Technology PLC (NASDAQ:STX) reported its financial results for its fiscal fourth quarter and year-end 2011. Seagate is one of the world's leading manufacturers of computer hard drives, and according to the company, in its last fiscal year it shipped over 199 million units worldwide. These shipments generated $11 billion in revenues and net income of $511 million, with a gross margin of 19.6%.
While these numbers are pretty impressive, they would have been otherwise unremarkable to the denizens of the upstream rare-earths sector, if it weren't for some comments made by Seagate's CEO, Stephen Luczo, on a conference call with analysts this past Wednesday. According to Barron's, Mr. Luczo said that
The cost of many upstream materials, especially rare earth elements, which have increased significantly, these cost are expected to adversely impact gross margins by at least 200 basis points. In regards to the increase in cost of upstream materials, Seagate has historically been able to observe these cost increases and insulate our customers. However, the recent increase in the cost of rare-earth elements, combined with the pre-existing upward trend of other commodities, far exceeds our ability to offset cost reductions.
This is just about the first time that I've seen a prominent end user within the technology supply chain, actually publicly quantify the effects that increased rare-earth prices have had on their margins. Some commentators have claimed that rising dysprosium (Dy) prices have caused these loss of margins, but this is not so (though not a million miles off the mark). Let's take a look at what IS the likely root cause here.
First, let's ask ourselves a question: just how, exactly, are rare earths used in computer hard drives? The answer is that they are found in two sub-assemblies that contain rare-earth permanent magnets (REPMs), which are critical to the functionality of the hard drive - specifically:
- The spindle motor - this is the sub-assembly that causes the platens within the hard drive, on which the data is stored, to spin at high speeds to enable access;
- The voice-coil actuator - this is another sub-assembly within the hard drive, that moves the read / write head(s) to the correct position.
Both motors and actuators operate on the principle of converting electrical energy into motion, through the manipulation of magnetic fields associated with coils and with permanent magnets. In the case of the spindle motor, the motion is rotary; with the voice-coil actuator, the motion is from side to side. Both sub-assemblies are controlled by sophisticated electronics, which coordinate all movement of sub-assemblies within the hard drive.
As I said, each sub-assembly contains REPMs - however, the magnets in each sub-assembly are distinctly different from each other. Those in the spindle motor are usually so-called polymer-bonded permanent magnets, based on an isotropic (the properties are the same in all directions) compound that principally contains neodymium, iron and boron (the so-called Nd-Fe-B composition).
These polymer-bonded magnets are made by mixing the Nd-Fe-B powder with a special binder, which allows the magnets to be pressed easily and precisely to a final shape, with little-to-no additional machining required. More specifically, the typical polymer-bonded magnet used in spindle motors is made by magnet manufacturers using powders produced by the Magnequench division of Neo Material Technologies Inc. (TSX:NEM). Magnequench produces a range of different powders for a variety of applications; variations on its MQP powder family, some with additions of cobalt (Co), and occasionally niobium, will be used for these magnets. For those who like to get into the technical nitty gritty, typical magnetic properties of these materials are Br = 6.5 - 7.5 kG (650 - 740 mT); Hci = 5 - 9 kOe (415 - 715 kAm-1;) and BHmax = 8.5 - 11 MGOe (70 - 90 kJm-3).
You might have noticed that I have yet to mention Dy here. Virtually every man and his dog in the rare-earths sector will tell you that all Nd-Fe-B magnets need Dy as an additive to make them work at higher temperatures. And I'm here to tell you that every man and his dog would be wrong.
Dy is not used in the aforementioned magnet materials found in hard-drive spindle-motor magnets. Instead, improvements in performance of these materials at higher temperatures, come from increasing the Curie temperature of the materials by those additions of Co, which substitutes for some of the Fe present. The Curie temperature is the point at which the magnet will lose all of its magnetism. And since we're dispelling half-truths here, let's dispense with another one; again, contrary to popular belief, Dy does NOT raise the Curie temperature of the magnets to which it is added (at least not to any significant degree). Instead, Dy improves the higher temperature characteristics of a magnet, by producing a compound that is more resistant to being demagnetized. A byproduct of this is an increased ability to resist the effects of increased temperature.
The downside to adding Dy to a REPM, however, is that while it increases the resistance to demagnetization, it actually decreases the magnetic output of the magnet, or the so-called residual induction of the magnet. So there is a trade-off in the use of Dy. This is why the second set of magnets in the computer hard drive, those to be found in the voice-coil actuator, generally contain no Dy either. The typical computer hard drive does not use any components that contain heavy rare earths, such as Dy.
Because the voice-coil actuator sees very little temperature variation beyond the ambient room temperature, there is no need to add Dy to the permanent magnets used in this sub-assembly. Unlike the spindle motor, the voice-coil actuator uses anisotropic (has a preferred intrinsic orientation) sintered Nd-Fe-B permanent magnets, i.e. they are produced without a binder. The magnet material grade used for these magnets is selected to maximize the residual induction of the magnet, which in turn gives greater sensitivity to the overall functionality of the voice-coil actuator, i.e. to move the read/write heads to precisely the right place at the right time. Again, for the techies, the typical magnetic properties of these sintered materials are Br = 14.2 kG (1420 mT); Hci = 14 kOe (1120 kAm-1); and BHmax = 50 MGOe (400 kJm-3).
In some material grades we may see a small amount of the Nd substituted with praseodymium (Pr). This is primarily to allow for the use of didymium (a mixture of Nd and Pr) in the magnet manufacturing process, reducing the price a little. However, anything more than 20-25% substitution and the performance of the Nd-Fe-B-based magnet will degrade - Pr can NOT be used as a full substitute for Nd, for this reason.
Since the escalating price of Dy has nothing to do with the reduction on gross margins for Seagate, and by implication other hard-disk drive manufacturers (since these hard drives don't contain any Dy), what is causing this effect? The answer of course, lies in the rising costs of the other rare earths present - i.e. Nd, and possibly Pr. More specifically, however, the timing of Seagate's remarks would perhaps indicate that they are procuring most of their magnets (at least the sintered magnets for the voice-coil actuators) from Chinese magnet manufacturers.
How do we know this? Take a look at the following charts, showing the spot prices of oxides of Pr and Nd over the past 13 months, for both exported and non-exported materials originating in China:
The usual tales of woe concerning price increases for rare earths, center on the export prices for these materials. As we can see from these two charts, the imposition of ever-increasing export quota surcharges by the Chinese traders, caused a significant divergence of pricing between internal and export product. The less-reported detail to this, however, is that for these and other light rare earths, the price in China remained effectively flat until around January or February of 2011. At that point, the price of these materials started to increase, and soon even the Chinese REPM manufacturers began to feel the pain, as did their customers.
Such price increases would have manifested in the associated downstream products after some period of delay. If Seagate has not previously reported challenges with their margins, caused by rare-earth prices, then it is reasonable to assume that they have only recently started to feel the effects, which would strongly indicate that they are sourcing their sintered magnets from China. The cost of the magnet powders for the polymer-bonded spindle-motor magnets has also increased, but it is less clear from where Seagate buys the magnets made from these powders, since Magnequench powder is used by a variety of magnet manufacturers around the world.
In case you're interested, even though there is pretty much no Dy in computer hard drives, here is a chart showing the recent prices for Dy oxide:
Here we can see that the effects of the quota surcharges, while still significant, have not caused as strong a decoupling of the prices associated with internal and exported product. Interestingly, for part of June, the internal price in China appeared to be higher than that of exported materials, though that has since changed.
Finally, it's an interesting exercise to do a rough calculation to see the quantity of rare earths used in computer hard drives each year. If we focus on the sintered magnets alone, given the fact that such magnets typically weigh around 6 g, and there are two magnets per assembly, and given the fact that Seagate shipped 199 million units in their last fiscal year, that amounts to 199,000,000 x 6 x 2 = approximately 2,388 t of sintered Nd-Fe-B magnets last year. Those magnets would contain approximately 715 t of Nd metal, equivalent to the amount of Nd in 845 t of Nd2O3. Recent data-storage industry figures estimate Seagate's share of the market to be somewhere around 28%, so a rough estimate of total rare-earth usage in sintered magnets for the hard-disk drive industry, would be over 3,000 t of Nd2O3 equivalent, each year. That would account for as much as 12-15% of the currently annual global supply of Nd2O3, a pretty significant fraction - and that's not even taking into account the Nd content of the spindle motors!
The hard-disk drive industry is therefore an important end-use market for rare-earth materials, and the components which contain them. Both ends of the overall supply chain would do well to keep a closer eye on each other...
Update ( 07/23/11):
As part of a response to a comment below, here is the price chart for samarium oxide: