Rare earths fall: 3Q takes a breather ::Macquarie Research,

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Rare earths fall: 3Q takes a breather
Event
 Latest rare earth metal (REM) prices have continued to back down
significantly since the end of July 2011 implying positive impact to
components companies in 2H FY3/12. We have seen cerium (-55%),
dysprosium (-19%) and neodymium (-22%) oxide price drops from their peaks.


Impact
 We flag positive impact on components companies but believe that positive
impact would be most reflected from December quarter onwards. We highlight
significant potential impact on motors companies based on their previous
forecast:
 Nidec estimated ¥5-6bn rare earth impact on 2Q OP. We estimated 2Q
OP is likely to see ¥2-3bn profit impact due to rare earth price hike. With the
price trend now reversing, and the company has been taking steps to reduce
the amount of rare earths used in motors as well as to negotiate for cost
sharing with clients, we think the impact is likely to narrow in 3Q.
 Minebea estimated ¥3-5bn raw material impact on FY OP in rotary
components. We have estimated that rare earth price increases would have
¥2-4bn hit on earnings but this could also be lighter as the effect of lower rare
earth prices kick in from 3Q.
 Mabuchi added ¥0.9bn impact to FY OP guidance due to rare earth price
hike. We highlighted raw material impact (company estimated ¥3.8bn) as the
major swing factor on full year profitability.
 Yen also works in favour of components companies in rare earth imports
even as the price fall flattens out, as USDJPY appreciated close to 6% from
the low of 81.25 in July 2011.