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Apple slips on a ring of blue glass

Friday, 8 Nov 2013 | 6:22 PM ET
Apple iPhone 5s
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Apple iPhone 5s

The hottest gem on the market these days may be the iridescent blue sapphire—on your iPhone.

Apple on Monday signed a $578 million deal with U.S. manufacturer GT Advanced Technologies to become its producer of sapphire substrate, or sapphire glass.

Eric Virey, senior LED analyst at Yole Développment, said the deal will transform the sapphire glass industry. GTAT, which previously made sapphire production equipment, can now produce the same amount of sapphire as the current world capacity—thereby doubling the available supply, he said.

(Read more: Phablet sales soar amid smartphone screen wars)

The partnership with Apple will also likely give GTAT, which has a unique, automated production process, an edge in the market, Virey said.

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Having a more dependable supply could allow Apple to innovate with the glass.

Second in hardness to diamond, sapphire glass is durable and scratch-resistant. It is already used to cover the iPhone 5 camera lens and home button on the iPhone 5s.

The glass is also a luxury item. The nearly unbreakable sapphire glass can cost up to seven times as much as Corning's Gorilla Glass, which is used to make most smartphone screens. In fact, only the $3,000-plus Vertu smartphone uses it for its touchscreen.

(Read more: Your next upgrade? The $6K smartphone)

Because of the cost burden, most analysts agree that a large iPhone or any other large-format smartphone with a sapphire screen would be too expensive for the current market. But if Apple needed a smaller screen—perhaps for a future iWatch—it would have broader use for sapphire glass, analysts said.

Some high-end watchmakers, such as Tourneau and Tissot, already use sapphire as a protective cover.

But a potential Apple smartwatch isn't the only reason the tech giant is getting its hands on more glass, according to industry experts.

Potential for sapphire glass in mass production of small home buttons and camera lens covers for Apple devices may have also spurred the partnership, said Richard Son, senior analyst at industry research group IHS.

Sapphire's main use currently is in LED lights. But Taiwan-based analyst firm LEDinside said the demand for non-LED uses will increase at least 20 percent next year as more phonemakers follow Apple's lead.

LG's latest G2 phone and ZTE's newly released Nubia 5 feature sapphire camera lens covers.

With wider interest for sapphire glass in smart devices and all GTAT's production of it going to Apple, LEDinside predicts that the present oversupply will become a shortage by 2015, which will drive up prices. The following chart, based on data from the firm, shows the demand to supply ratio of sapphire substrate (or glass).

Sapphire glass prices are expected to rise 10 percent to 15 percent in both the first and second quarters of next year, Virey said.

By expanding its equipment manufacturing to production, GTAT hopes to position the company as the industry's lowest-cost sapphire glass producer, said President and CEO Thomas Gutierrez.

"While the gross margins from this business will be lower than historical levels, we expect this arrangement to be cash positive and accretive to earnings starting in 2014," Gutierrez said in a prepared statement for the third-quarter earnings call.

GTAT shares spiked to 10.5 from 8.4 Monday after the deal was announced.

Shares of the other publicly traded sapphire provider in the U.S., Rubicon Technology, also rose slightly.

As part of the deal, Apple will provide a sapphire glass facility in Arizona for 700 employees, generating 1,300 jobs in construction and related areas, according to a statement from the state of Arizona.

GTAT, in turn, will focus its sapphire production resources on that operation to reimburse Apple for its $578 million investment in the project. The reimbursement will be done over five years beginning in 2015.

Other large but private sapphire providers include Russia's Monocrystal and Korea's DK AZTEC. Korean-held Sapphire Technology, whose shares trade below GTAT levels, is a major global producer.

(Read more: The most widely held stock in 401(k) portfolios)

Production of sapphire glass at the Arizona plant is slated to begin by mid-2014.

—By Evelyn Cheng, Special to CNBC

This article has been updated to correctly reflect the name of LEDinside.

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