Forecasts For Growth:

The salient, or leading edge demand components in passives between 2007 and 2011 will be the MLCC, thick film chip resistor, and multilayered chip inductor.  These specific devices will be consumed in increasingly larger quantities in portable and leading edge electronics over the next five years.  Leading the way for passive component unit consumption, miniaturization and integration will be wireless handsets, notebook computers and flat panel television sets which require increasingly greater capacitance, resistance, inductance, sensing, filtering and pulsing capabilities in their designs.

Growth is also anticipated for narrow portions of the other “niche” passive component markets, including surface mount aluminum electrolytic capacitors, ultra-small case size tantalum chip capacitors (conductive polymer cathode); EMC chip inductors; surface mount wirewound inductor coils; DC film chip capacitors, niobium-oxide capacitors, thin-film integrated passives, multi-chip resistor arrays, surface mount PPTC and NTC thermistors and surface mount varistors.   Each of these niche sub-segments should grow as fast, and with greater profitability than the comparable high volume passive component lines.

Through 2009 consumption in specific high volume segments of the market can logically be determined to some degree of accuracy, including, but not limited to:

• the inclusion of MP3 in wireless handsets
• the requirement for HDTV tuners in the U.S. CATV markets
• the rollout of the Pentium 5 in 2009.

These events will fuel rapid growth for high volume MLCC, ChipR and EMC inductor components, as well as create profit centers for specialty components, such as ultra-small case size tantalum, solid polymer aluminum, PPS film chip capacitors, thin film resistors and a wide range of surface mount power inductors. Growth for 2010 and 2011 is difficult because visibility is limited.  However, in 36 months there may be advances in robotics, smart homes and personal portable electronics that may have an impact on the market that cannot be determined at this time.

In emerging growth markets the key candidates for future investment are niobium-oxide capacitors, thin film integrated passives; diamond-like capacitors; supercapacitors and DC link capacitor assemblies.  Key areas of associated growth will be in nickel and ceramic nano-powders; conductive polymers, niobium ceramics; double layer carbon materials and polypropylene raw materials.

Long-term threats to the individual discrete component market continue to come from integration of passive component functions on the silicon substrate; the development of integral passive materials for use in LTCC and FR4 substrates; and the concerted effort to produce specialty passive components using semiconductor production processes.  These technologies have been available for many years and have not made any major inroads into the individual discrete passive component space because of high costs to produce and high costs of packaging.   These new technologies will continue to grow over time as they become more accepted outside of the specialty segments of the market where they thrive today.

Subsequently, and based upon multiple methods of research, it is highly probable that demand for passive electronic components will grow over the next five years and this justifies capacity expansion in the industry in 2007.  In the near term however, there is reason to be concerned about component vendor profitability amidst such a large amount of capacity coming on line at one time, and higher raw material prices in 2007. Since over the past 15 years, the market tends to repeat its cycle, it is interesting to try to predict where we are in that cycle at this time.

Five Year Cycle: Where We Are Now…

The market is staying somewhat true to certain aspects of a five-year cycle, most notably with respect to the increase in capacity to produce the high volume MLCC and chip resistor products (with most of the top seven global vendors announcing capacity expansion of up to 30% in units beginning in April 2007). This typically follows a significant growth in industry revenues, which had been realized in 2005 and 2006.  Additional capacity expansion is noted for tantalum capacitors and surface mount aluminum capacitors as well.  Also true to the five-year cycle is the increase in raw material prices, which will begin to impact the market beginning in April 2007.  This has happened at critical moments in the cycle; (1996, 2001 and 2007) although in 2007 the price increases are affecting all metals simultaneously. This is different than in the past, when materials price increases were localized to one or two critical powders.  In 2007 the number of metals affected by price increases is impacting all the major passive component products.

The most substantial impact on higher metals costs will be in thick film chip resistor industry and the MLCC industry, which use ruthenium resistive pastes and nickel electrode pastes respectively.  Both metals have seen remarkable growth in price between 2005 and 2007, with the greatest impact being felt in April 2007 as new contracts (for engineered powders and pastes) are written for materials in conjunction with the beginning of the new fiscal year in Japan and China.

Ruthenium prices have increased so substantially that the impact on costs to produce chip resistors are causing some vendors to move supply contracts to raw material houses, which is inherently risky and may impact component quality. There is a trend among the ultimate consumers of passive components to focus on raw materials consumed by their component vendors and not allowing thrifting of metals or changing suppliers without their prior consent.

In MLCC, the equation is different, with vendors that have a higher percentage of high layer count MLCC as having greater exposure to price increases in nickel.  However, vendors of high capacitance MLCC can also rest assured that increases in tantalum raw material and aluminum raw materials which are consumed in the rival electrolytic capacitors, are also increasing. 

When Two Economic Forces Combine; Something Must Slip or Give Way…

The results in the metal prices increase will impact the cost to produce passive components in 2007 and 2008 (when new metal assets will be brought to market worldwide), which will impact profits.  The result of this combination is usually a compromise, where costs are passed up and down the supply chain and are offset by shifts in market share among the engineered materials producers, the component manufacturers, and the ultimate customers.  (Already in Asia there is evidence of shifting vendors in the supply chain as metal paste producers attempt to gain share in markets that are dominated by a few top vendors and many smaller firms fighting for share). 

At this time in the cycle it is also important to offer a broad product portfolio of like components so that the ultimate customer can offer to take more of a certain product line.  Ultimately, in the five-year cycle, it is the consumer who gains the price erosion, especially in years of capacity expansion. Therefore, it is logical to conclude there will be an impact on profits for the passive component vendors as the component customers demand the price reduction they have been getting regularly over the past 20 years. 

Ultimately the only winners for the next 24 months with any degree of certainty is the mines in South Africa with emphasis upon Amplats and Impala (not to leave out the awesome mines at Norilsk, or the assets of Inco and Umicore either!) and Johnson Matthey and Engelhard who have the best assets in place for profitability.  According to sources inside this end of the business, there is no end in demand for metals coming from multiple industries and competition for both precious and base metals will continue for the next 24 months.  (Their primary concern is thrifting affecting quality amidst industry shortages). 

Metals continue to be the one weakness of the passive component manufacturers, as they cannot control this part of their supply chain beyond the engineered material level (short of investing in their own mines, which is a rarity but a logical progression of the supply chain, especially in tantalum).  There are some historical comparisons of note and their results paint a picture for what might happen. For example, in 2001 tantalum capacitor manufacturers faced a huge increase in price that could not be passed onto the consumer.  This impacted the profits of the tantalum capacitor manufacturers.  In 2001 a similar event impacted the palladium metal industry, where there was no choice but to move to nickel for all new capacity additions.  Thus, in 2007 and 2008 there may be movements to replace ruthenium with nickel in resistors and to thrift other metals, as this has happened in the past in the cycle and may logically happen again.  Typically the ultimate customers want their price to decrease, especially when they know the vendors have increased capacity. Therefore, the fight over raw materials becomes one between the component manufacturer and his raw material vendor, as pushing back on price at the component level is believed to be difficult at this time. Consequently, profits will move away from the passive component vendors through the engineered materials vendors and to the refiners and mines. This profit will logically return to the component vendors after metals prices stabilize with the advent of new mines sometime in late 2008.