As the global political environment heats up, with new friends falling back on old ways; applying their age-old training on how to win the cold war, a small but not so insignificant casualty are the materials consumed in the production of electronic components. If this was the only governmental pressure impacting the electronics industry in 2014 it would be easy to dismiss as a passing event, that will dissipate with the limited attention span of modern folks in the digital age; however, additionally, there is also the purposeful manipulation of currencies that are impacting component pricing and making the playing field uneven and legislation regarding conflict minerals that when taken collectively create a story ripe for publication in this month’s edition of MarketEYE.
Sanctions imposed by the United States Treasury against Russia as of March 25th 2014 have been against individuals (16 Russian politicians and four business executives), and include a ban on doing business with Bank Rossiya (which is associated with Vladimir Putin’s cabinet). Meanwhile, the European Union has also imposed international sanctions, but against a larger number of individuals, totaling 33 politicians and business executives, all in response to Russia’s annexation of the Crimea region of Ukraine. Russia’s response was to impose sanctions of its own, and also against individual lawmakers and politicians in the west. It is important to point out that no country has imposed international TRADE sanctions, primarily because both sides stand to lose considerable assets and materials as a result of an escalation of sanctions that would include trade embargoes. Regardless, even the potential for a trade embargo has caused two metals important to the passive component industry to increase in price during the month of March, 2014. The metals in question are nickel and palladium; both are consumed in the global ceramic capacitor industry as the primary electrode materials for multilayered ceramic chip capacitors (MLCC) which is considered the workhorse of the entire passive component industry. In turn, it is consumed in massive quantities and critical in operating almost every electronic device built today; cellular telephones, computers, automobiles, TV sets, medical devices, oil and gas electronics, defense electronics and almost every electronic device being produced today employs massive quantities of MLCC and require electrodes containing either nickel or palladium to operate. Russia supplies 41% of the world’s palladium and 17% of the world’s nickel from their massive mining complex in Norilsk Siberia and boasts 6 million tons of nickel and 56.6 million troy ounces of palladium in provable reserves. In CY 2013 Norilsk sold approximately $2.2 billion U.S. dollars worth of nickel and $950 million U.S. dollars worth of palladium, of which about 55% went to Europe, 25% went to Asia and 10% went to North America for consumption. Nickel’s primary usage is as an additive for steel and an additive for super alloys, but it also is a key element in the production of MLCC. In March 2014, based on the threat of international sanctions alone, the price of nickel increased by 13.5% on a month-to-month basis.
Figure 1.1: Average Price per Ton for Nickel by Month from April 2013 to March 2014
Source: KITCO; Compiled by Paumanok Publications, Inc., The Threat of Sanctions Has Caused the Price of Nickel to Increase 13.5% Between February 2014 and March 2014.
Figure 1.2: Average Price per Troy Ounce for Palladium by Month from April 2013 to March 2014
Source: LME; Compiled by Paumanok Publications, Inc., The Threat of Sanctions Has Caused the Price of Palladium To Increase 6.8% Between February 2014 and March 2014.
Most interesting is the potential for a trade embargo resulting from the Russian annexation of Crimea will have the greatest impact on the cost to produce the multilayered ceramic chip capacitor because ironically, MLCC employ only two primary electrode systems, one based on nickel and one based upon palladium. So while researchers contemplate the impact of a trade embargo impacting the autocatalyst industry (palladium is also used in catalytic converters which is the largest end-market for palladium worldwide, however, the only alternative metal that can be used in autocatalysts is platinum, which is $1400 per troy ounce, or almost 1.8 X the current price of palladium, so the automobile manufacturers are not as sensitive to the price of palladium as are the ceramic capacitor manufacturers) and the steel industry (the lion’s share of nickel). Almost half the world’s nickel output is consumed as an additive for steel production with little notice paid toward the impact that a price increase would have on MLCC pricing, which is far more sensitive to even the slightest changes in its cost to produce.
Our primary sources in the raw material supply chain suggest to us that should the process of sanctioning Russia continue and the exchange between Russia and the west become more heated, (which would most certainly result from any larger designs Russia might have on occupying the Ukraine region), the results would be an estimated 20% increase in the price before the stockpiles of each metal are released on the world.
The largest impact on the global electronic component markets in FY 2014 (Year ending March 31st) has been the depreciation of the yen, which encouraged customers from around the world to source electronic components from Japan at the expense of almost every other country producing components in Europe, the Americas and in the Asia Pacific region. Japanese vendors of passive electronic components for example (capacitors, resistors and inductors) enjoyed an average annual growth rate in revenues derived from components of 16% in FY 2014, while vendors in the West enjoyed growth rates averaging only 2%. This is the direct result of the economic policies advocated by Shinzo Abe since his December 2012 general election as Prime Minister in Japan. Referred to as Abenomics in the West, the strategy involves the employment of “three arrows” that include “Fiscal Stimulus,” Monetary Easing” and “Structural Reforms,” designed to shock the Japanese economy out of the 20 year anemia it has suffered and to encourage foreign direct investment in Japan. The affects of Abenomics on the Japanese economy was arguably profound. The yen dropped to become about 25% lower in value than the U.S. dollar, and the Japanese stock market grew by 55% and consumer spending skyrocketed. The impact on the electronic components industry was equally profound as Japanese vendors enjoyed growth rates that far exceeded that of its competitors in the United States, Germany, Korea and China. For FY 2015 we expect the economic policies of the Abe administration to continue to have an impact on the global passive components industry and benefit the Japanese manufacturers over western vendors.
Figure 1.3: FY2013- 2014 Comparative Growth Rates in Revenues by Japanese Passive Electronic Component Vendors versus Vendors from Other World Regions
Source: Paumanok Research in 2014: Japanese vendors of passive components averaged 16% growth in FY 2014 due to Abenomics, compared to the manufacturers in other parts of the world which averaged only 2% growth year-over-year.
Dodd-Frank Act: Tantalum and Tin:
According to the terminology used in the SEC Government web site, “The Securities and Exchange Commission (SEC) has adopted a rule mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act to require companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (DRC) or an adjoining country. The regulatory reform law directed the Commission to issue rules requiring certain companies to disclose their use of conflict minerals that include tantalum, tin, gold, or tungsten if those minerals are ‘necessary to the functionality or production of a product’ manufactured by those companies.”
Some critical electronic components, such as tantalum capacitors are manufactured using the minerals specified in the Dodd-Frank Act and all electronic components employ tin based solder to adhere the components to the printed circuit board. The passage in the Dodd-Frank Act covering conflict minerals (Section 1502) notes that documentation may be required by all parties involved in the final manufacture and assembly of products containing components that have the minerals outlined in the Act. Said documentation must be supplied by independent third party supply chain traceability audits and reporting of audit information to the public and SEC. However, even companies not directly regulated by SEC will be impacted by the audit requirements because information/audit requirements will be pushed down through entire supply chains, including privately held and foreign-owned companies. However, documentation is not standardized and can assume many forms. While there are no specific legal penalties yet specified for products that might contain these outlawed minerals, these can be expected and could result in significant monetary risks for all involved. Even today, the “court of public opinion” can have major risks for any company or product found to be in violation of the Act and this is what truly concerns the tantalum and tin supply chains. Section 1502 of the Dodd-Frank Act is designed to prevent the exploitation of the natural resources of the DRC, but because of confusion surrounding its meaning, many in the supply chain want their vendors to have no association with Central Africa at all, thereby avoiding brand exposure to the court of public opinion. This was not the intention of Section 1502 of the Dodd-Frank Act, which was designed to legitimize the trade of rare metals from the Congo, so that materials could be taxed by the legitimate DRC government and monies applied to building badly needed infrastructure in that country, and to avoid materials sales that would finance militias from foreign countries and roaming bands of thieves.
Summary and Conclusion:
Taken separately, each of the above mentioned actions would have a marginal affect on the electronic component supply chain. However, when viewed collectively it is apparent that global politics are having an impact on the costs associated with bringing electronic components to market. The threat of international sanctions between Russia and the west are causing a rise in the prices for key precious and base metals required for the production of ceramic chip capacitors while calling into question the availability of these metals should trade embargoes be initiated. Japanese attempts to invigorate their economy have depreciated the yen value causing many customers buying electronic components to purchase from Japan at the expense of Western and other Asian vendors, and this has created an uneven playing field. And finally, U.S. government legislation has impacted the ability for a foreign nation to sell its natural resources, impacting the overall costs associated with trading in tantalite on a worldwide basis. And while the intentions associated with each of the above mentioned events were positive, the collective effects have not been keenly democratic at least not as far as the electronic components industry is concerned.
Statements of fact and or opinions expressed in MarketEYE by its contributors are the responsibility of the authors alone and do not imply an opinion of the officers or the representatives of TTI, Inc.
Dennis M. Zogbi
Dennis M. Zogbi is the author of more than 260 market research reports on the worldwide electronic components industry. Specializing in capacitors, resistors, inductors and circuit protection component markets, technologies and opportunities; electronic materials including tantalum, ceramics, aluminum, plastics; palladium, ruthenium, nickel, copper, barium, titanium, activated carbon, and conductive polymers. Zogbi produces off-the-shelf market research reports through his wholly owned company, Paumanok Publications, Inc, as well as single client consulting, on-site presentations, due diligence for mergers and acquisitions, and he is the majority owner of Passive Component Industry Magazine LLC.