Average Price of Feedstock Materials Consumed in Passive Electronic Components up 105% Year-On-Year

02.08.2010 // Posted by: Dennis Zogbi // Posted in: Articles, Passives

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In a comparison conducted by Paumanok Publications, Inc. of average global prices for critical materials consumed in the production of passive electronic components between January 2009 and January 2010, we have determined that the average price for key feedstock materials consumed in the passive electronic component industry has increased by 105% on average year-on-year (See Summary Table Below)

Summary Table:

Changes in the Average Price For Critical Feedstock Materials Consumed in the Passive Component Industry: 2008-2009-2010 (January)

Summary Graph:

Materials to Watch in 2010:

Given the steep global economic downturn experienced in 2009, such price increases for critical feedstock materials noted in January 2010 signify an increase in volume demand for metals at a rate that cannot be readily absorbed by a supply chain that is running lean. The benchmark for comparison is the January 2008 prices for the same materials (which is shown in the table above). January 2008 is considered the “control” month for this exercise as the volume demand at that time could be considered at or near the industry peak cycle. However, and most importantly, it should be noted that between January 2008 and August 2008 many of the metals discussed here experienced rapid price increases in response to increased demand from multiple industries. These rapid price increases were not just in response to volume demand, but also as a result of speculation by both industries and nation’s who began stockpiling key materials for renewable energy initiatives. Compounding this was the substantial increase in global fuel prices (also included in the chart above), which had a major impact on every point of the supply chain. It is Paumanok Publications, Inc. position that the global economic downturn of 2009 was a reprieve from these variable pressures, and the 105% year-on-year average increase in feedstock material pricing is an indicator that these same pressures are returning as the global economic environment improves.

What’s in Line and What’s Not:

Based upon the various end-markets that Paumanok Publications, Inc. covers in its research on passive electronic components, it is our contention that the global revenue base in the high-tech economy is down by 25% on average when compared to January 2008. It is also apparent now that since the global economy was at its worst in January 2009, the market has grown quarter-to-quarter at double digit rates. Still demand in the first quarter of 2009 was so far down that it will take more time for the market to recover fully, but the markets are moving in the right direction. Therefore we expect feedstock material pricing to be at or below January 2008 levels. However, in many instances, we note that prices for critical feedstock materials have already exceeded the January 2008 price, and as this filters its was up the supply chain it was an adverse impact on the variable manufacturing costs of passive component manufacturers.

Of particular concern in 2010 is the price increases for copper, zinc, palladium, silver, tantalite and niobium. The average price for these critical feedstock materials has already exceeded pricing in January 2009 when the global economy and materials demand was more robust. The primary reason why these materials have seen increases, apart from the impact of finance speculation, is that many of their key sources have been idled in an attempt to save money, and their restart remains uncertain, as does visibility, which results in excessive pricing that must be either passed up the supply chain or absorbed.

What Components Are Impacted:

Feedstock materials are consumed by engineered materials manufacturers of various powders and pastes that create a product that can be consumed in the manufacturing process of the passive component manufacturer. These raw materials in fact are a part of the variable manufacturing cost of the entire passive components industry.

The variable manufacturing cost in passive electronic component manufacturing differs by component type and dielectric, but averages about 55% of all costs of goods sold. Therefore, what we look for in the above chart is the combination of materials pricing impacting a single component group. The increase in price for both palladium and silver precious metals is concerning, as they dovetail with respect to their use in low layer count MLCC, primarily in NPO type and X7R type ceramic chip capacitors that use palladium in their electrodes an silver in their terminations. MLCC manufacturers who compete in the “picofarad” MLCC business will be faced with materials price increases that will be in excess of other materials.

The remaining materials impact different components. Copper, for example, is a key feedstock material in high capacitance MLCC terminations (all types), although termination materials costs are only a small percentage of overall CGS for high cap MLCC manufacturers.

Zinc, on the other hand, is a major cost factor in the production of metal oxide varistors, which are used, in large volumes for ESD protection in digital electronics, and for overvoltage protection in their disc form, and for lighting protection in their arrester form. Tantalite materials pricing is also of key concern. Tantalite is consumed in its powder and wire form in tantalum chip and throughole capacitors. Paumanok believes the price for tantalite has the potential to increase much farther, and that current pricing is only limited by the above-ground inventories which continue to supply the industry. Niobium, which is consumed in its powder form for niobium oxide and niobium metal capacitors is also increasing. And since niobium and tantalum are usually found in tandem and have similar properties, their associated price increase should be noted (this signifies an increase in demand for tantalum and niobium from other industries- mainly superalloys).

How this Impacts Variable Costs to Produce:

As we have noted, the impact upon variable costs to produce passive components varies based upon the type of passive component in question. To illustrate this using the four primary capacitor dielectrics, we can see how certain parts are more sensitive to changes in the variable materials cost to produce. Film and aluminum dielectric capacitors, for example, count raw materials at 64% and 60 % of their costs to produce, and therefore these dielectrics are particularly sensitive to increases in raw material price. Other dielectrics, such as ceramic and tantalum have higher costs to produce associated with equipment and related costs. This is because ceramic is based upon stacking technology, while tantalum is based upon porous anode construction. Aluminum and film dielectrics on the other hand, have lower comparable costs to produce because their production method is based upon winding- and winding equipment is not as costly to procure, depreciate and maintain when compared to the kilns and ovens associated with ceramic and tantalum capacitor production.

Source: Paumanok Publications, Inc. Estimates

Conclusions:

Even though feedstock materials pricing has increased by 105% on average between January 2009 and January 2010, it is the impression of Paumanok Publications, Inc. that prices are rising in accordance with increased demand as a result of an improving global economy. Part of the price increase is the result of the supply chain not able to handle the increase in demand due to industry-wide idling of capacity in 2009. For certain price increases, especially for precious metals, part of the price increase is due to speculation.

It is also apparent that certain feedstock materials have increased in price at a rate that exceeds other materials, and that at critical junction points were rises in feedstock materials dovetails into one component- such as NPO type and low layer count X7R MLCC, there will be added pressure to pass those costs up the supply chain to the consumer. Metal oxide varistors also seem vulnerable to the substantial increase in the price for zinc.

Other materials, such as tantalite for example, have already increased in price, but we feel they still have room for price increases as inventories dwindle and prices respond accordingly- niobium would be the other area where prices may increase during the 2010 calendar year.

Other materials, especially aluminum, have not as of yet returned to their January 2008 levels, but their upward movement suggests that they are well on their way to resuming the elevated price status they experienced before the downturn. Oil prices are another concern, not simply because of their impact on film capacitor dielectric costs, but also because they can have significant impact on variable freight charges for manufacturers up and down the supply chain. As we have shown, film and aluminum dielectrics are most sensitive to changes in feedstock pricing because variable materials costs are a significant part of their overall costs to produce.

Finally, ruthenium, the key ingredient in thick film resistor chips and networks is still well below its January 2008 price levels. However, we have noted a spike in the price in recent months that is significant and should be noted. According to industry insiders, ruthenium price is increasing because of renewed interest in the metal for use in touch screen technology. The impact of increases in feedstock pricing will most probably lead to a stable price environment for passive components in 2010, with selected, albeit, minor price increases for specific components that rely on key metals to make or break their variable materials costs in 2010.

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