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Uncertainty Rules Passives Industry

Buyers can expect stable leadtimes for many passive components for at least the first quarter of 2012, but prices could increase if raw materials costs rise and component demand surges.

However, market uncertainty, coupled with the lack of visibility concerning inventory levels in the supply chain, makes it difficult to determine if there will be significant supply or pricing issues in 2012, according to suppliers.

In fact, the electronic components industry has been riddled with uncertainly over the past year. That uncertainty was caused by global economic woes, including anemic growth in the U.S. economy and the European debt crisis, as well as two major natural disasters. The earthquake in Japan and flooding in Thailand impacted the supply of several passive devices including aluminum capacitors, tantalum capacitors, and chip resistor arrays.

The passives industry has undergone a major transition over the past two years. Prior to the market rebound in 2010, buyers typically could count on 3 to 5 percent price cuts annually and stable lead times, typically ranging from 4 to 10 weeks, for most passive devices.

That is not the situation today. When the market rebounded after the recession, it caused industry-wide shortages for many component types, and buyers faced price hikes from 5 to 25 percent, on average. The trend continued into 2011 due to production capacity issues, increasing raw materials prices, and a short supply of certain materials.

Passives pricing outlook at a glance
•  Aluminum electrolytic caps: Stable to up (depends on yen/$ exchange rate, raw materials costs).
•  Ceramic caps: Stable to up (depends on raw materials costs).
•  Metal film caps: Stable to up (depends on raw materials supply).
•  Tantalum caps: Stable to up (depends on raw materials supply and production capacity in Thailand).
•  Resistors: Stable to up for mature product; down for newer products.
•  Inductors: Stable to up for mature product; stable to down for newer product (depends on copper pricing).
In general, suppliers agree that the likelihood of price hikes this year depend on the amount of inventory in the pipeline. Other factors that will impact pricing include the stability of raw materials pricing and market demand.

The amount of inventory varies by component. "Inventory levels are generally an issue more with capacitors," said David J. Valletta, executive vice president worldwide sales, Vishay Intertechnology, based in Malvern, Pa. "There also are some inventory issues for inductors, but resistors are in good shape.”

The products that were on heaviest allocation in 2010 and in early 2011 have the highest inventory levels now. "Distributors and customers were bringing in a lot of material because it was in short supply and there was the usual overshoot," Valletta added.

Leadtimes for passives are expected to range from stable to up in 2012. Suppliers also anticipate continued price hikes for some components including tantalum capacitors. However, weakened demand, combined with inventory in the supply chain, will likely keep prices for most components in check in the first quarter of 2012.

If the market rebounds as it did quickly in 2010, prices would rise and leadtimes will extend, according to suppliers. Prices will also increase – as they did for the past two years – if raw material prices rise again. However, it appears that prices for copper, nickel, silver, aluminum, palladium, and tantalum powder are stabilizing.

“I don't think they'll be a serious number of constraints across the dielectric spectrum. In general, things will be in balance except for some film raw materials because the market has come back strongly," said Daniel F. Persico, Kemet's vice president of strategic marketing and business development.
Prices and availability of supply of those materials had a significant impact on capacitor makers over the past year. Constraints in the raw materials supply chain for metal film and the aluminum electrolytic capacitors, along with custom applications, helped hold up average selling prices (ASPs), according to Daniel F. Persico, vice president of strategic marketing and business development, Kemet Corp., in Fort Lauderdale, Fla.

The mature metalized film capacitor market, which has seen resurgence in demand because of renewable energy and electric vehicle (EV) programs, may still experience some spotty supply issues. There are a limited number of materials suppliers for high reliability film materials, along with a limited number of suppliers that provide metallization, according to capacitor suppliers.

"There is a tremendous volume of film capacity in the world, but most of it targets consumer applications such as grocery bags and packaging,” said Persico.” There is a very small portion of film capacity focused on high quality, high reliability needs of the capacitor industry," said Persico. "Because it is such a small industry on a relative basis, people are reticent to put more capacity in place for this industry."

If the price of film capacitors rises, then materials suppliers are likely to increase production capacity to meet demand as long as they see a long-term profitable trend, according to Persico.

"I don't think they'll be a serious number of constraints across the dielectric spectrum," Persico noted. "In general, things will be in balance except for some film raw materials.”

Subhead: Expect more tantalum supply

Supply of tantalum capacitors could improve in 2012 because conflict-free tantalum ore is starting to ship from mines in the Democratic Republic of the Congo (DRC), which should help stabilize prices and leadtimes.

Although tantalum powder pricing has stabilized at a high point, Kemet expects powder prices to start to drop as more conflict-free tantalum ore comes out of the DRC.

Kemet has already received a shipment of tantalum raw materials out of the DRC. "This is conflict-free material in a closed pipe system and proves to others that you can do it correctly both from an economic and social perspective," said Persico.

"All our suppliers are either already certified by the Electronic Industry Citizenship Coalition (EICC) and Global e-Sustainability Initiative (GeSI) conflict-free smelter (CFS) program or are in the process of trying to get final certification," Persico added. "We have made it very clear to our suppliers that if you aren't CFS certified, you're not a supplier to Kemet.”

There is also a social component to the program. "We will build schools and clinics, as well as help build out the infrastructure so that the miners have a safe place to work and the children can go to school and the local community can benefit," said Persico.

AVX also recently announced that as of December 2011, all of its Congolese tantalum raw material, powder, and wire suppliers are fully compliant with CFS Program.

"Inventory levels are generally an issue more with capacitors. There also are some inventory issues for inductors, but resistors are in good shape," said David J. Valletta, Vishay Intertechnology's executive vice president worldwide sales.
While conflict free tantalum continues to flow from the Congo, there is still uncertainty about tantalum capacitor supply because of flooding in Thailand that shut down tantalum capacitor production for two major suppliers: NEC-TOKIN and ROHM Semiconductor. Inventory levels of tantalum capacitors are expected to be depleted in the first quarter.

With multilayer ceramic chip capacitors, rising prices have been an issue for the past two years. Suppliers said prices increased about 10 to 20 percent in 2010 and another 5 to 10 percent in 2011 because of higher costs for palladium, silver and other precious metals. However, pricing is expected to stabilize this year.

"Raw materials pricing has been stable, but they haven't come down," said Valletta. He cautioned there may be additional price increases in 2012 partly driven by inflation.

Subhead: Resistor prices stabilize

Resistor suppliers do not expect any supply issues in the short term this year, with the exception of resistor chip arrays. The flood in Thailand impacted resistor production, causing leadtimes to stretch for some product lines to 16 weeks from about six to eight weeks.

In general, resistor leadtimes are stable in the 6- to 10-week range, after stretching to 20+ weeks in 2010, and inventory is down significantly.

However, the lack of visibility in the channel could create challenges if the market rebounds faster than expected, according to suppliers. It will depend on how quickly the channel can adjust to the demand.

Kory Schroeder, director of marketing for Stackpole Electronics, in Raleigh, N.C. thinks production capacity could easily be brought on line and it would take a "significant upturn in the market" to cause supply issues.

"Currently, inventory levels are pretty low," said Schroeder. "Everybody last year was hesitant to put in a lot of inventory. We have a lot less product in the channel compared to three or four years ago before the big downturn.”

"Over the past few years, we made some incremental changes instead of going back to the way things were," Schroeder added.

Resistor price trends will vary this year by commodity. For example, buyers can expect stable to increasing prices this year, for mature products like leaded thick film resistors, as volume demand drops annually. In comparison, prices for newer products like Vishay's shunt resistors are expected to fall as volumes rise. It is the same old supply/demand scenario.

However, resistor suppliers have faced tremendous pressure on raw materials costs including palladium, gold, copper, silver and ruthenium – all used in the manufacture of resistive devices. This resulted in price hikes between 5 to 10 percent last year for some products.

Subhead: Spotty inventory for inductors

Similar to the resistor market, prices for mature inductor products are expected to stabilize, while prices for newer technologies and products including power inductors are expected to drop in 2012.

“If business comes back fast, there is very little inventory anywhere in the pipeline so inventory will quickly get sucked up and leadtimes will move out,” said Bruce Hamilton, general manager of Pulse Electronics' power division, in San Diego, Calif.
But again, pricing trends will be impacted by raw materials prices, particularly copper and nickel. "Copper is a big factor in inductors," said Bruce Hamilton, general manager of Pulse Electronics' power division, in San Diego, Calif. "Copper pricing went up then came back down again, but the pressure on copper will continue because electric vehicles consume a tremendous amount of copper."

Some inductor suppliers are taking advantage of the slowdown to implement cost-reduction programs to offset rising materials costs and wage increases in China. They are also investing in new product development.

Hamilton added that if the economy remains soft, Pulse Electronics will be able keep prices stable thanks to several cost reduction initiatives. These include the consolidation of Technitrol and Pulse for greater efficiency, moving its MRP system to SAP, which should significantly help its supply chain management processes and cost structure, as well as additional factory automation to reduce labor costs in China.

The company also has reviewed its product portfolio to discontinue low or no margin lines. Other cost reduction measures include negotiating with materials suppliers to reduce costs and focusing on lean manufacturing for further improvements.

This allows Pulse to focus on new product and technology developments. "When things are soft, it's the time to do it," said Hamilton. "You tend to get diverted when things are moving very fast."

Unlike the capacitor industry, there is spotty inventory in the channel for inductors, which could spell trouble if the market recovers quickly. "If things come back fast, there is very little inventory anywhere in the pipeline," said Hamilton. "It will quickly get sucked up and lead times will move out. If you look at 2008-2009 and 2011-2012, it's going to be rerun."

If the market snaps back quickly, inductor prices will spike up.

The same is true with other components as well. Most suppliers expect component demand to gradually return in 2012, but most growth will not occur until the second half. The level of growth for the passives industry is hard to forecast because of the lack of visibility concerning customer demand.

“From a mid- to long-term perspective, the lack of visibility of what the market is going to do over the next six to nine months is probably the single biggest issue we're facing right now," Persico noted.