The following installment of MarketEYE offers the reader both an annualized summary and a month-by-month analysis of the global passive electronic component markets for calendar year 2014. Passive electronic components are defined for the purposes of this article as capacitors, resistors and inductors.
2014 Annualized Review Summary
The world economy for the calendar year ending December 31, 2014 demonstrated single digit year-on-year growth because of sustained recoveries in the U.S. and Japan, coupled with minor improvements in the European economy. Concerns persist because of the slowdown in growth in China which we believe to be tied to lack of demand in Europe as a whole and the negative situations in Russia, Africa and Middle East. In the United States, the economy has continued to recover as personal consumption, housing sales, medical electronics, commercial aerospace and the mining industry continued to outperform, while the employment rate continued to improve. In Europe, the strong economy in Germany and beginning signs of improvement in Southern Europe made for a gradual recovery, although in the third quarter this recovery seemed fleeting to many in Germany, France and the UK, the three key European economies. As for Asia, China maintained its high growth rate after the government took diverse steps to bolster a slowing economy; however, their annualized growth rates was significantly limited by the slowdown of European purchased of goods made in China. In India and elsewhere, smaller growth rates were seen. In Japan, the economy continued its recovery, despite a temporary reaction to the hike in consumption tax, as signs of a short-term rally were seen, corporate earnings stayed high, and the employment situation continued to improve.
In the electronics industry, the demand for smartphones and tablets remained strong and some recovery was seen in the TV and personal computer markets. The automotive sector was also strong thanks to a firm global economy and increased adoption of in-vehicle electronics, and increased demand for new automobiles in both emerging and established economies.
The global market for passive electronic components showed slight recovery in 2014, after two years of sluggish performance. However, the increase in revenues was largely restricted to Japanese vendors due to a combination of favorable yen valuation and market access to wireless handset, tablet computer and automotive end markets. Revenues at western vendors of passive electronic components remained anemic throughout the year, showing very little growth and rather just exhibiting steady state revenues on a quarter-to-quarter, and year-over-year basis. Major Japanese vendors, on the other hand, reported the best quarterly revenues in their history. As noted, the continued transition to the high component content “Smartphone,” and dramatic increases in demand for tablet computers; coupled with excellent increases in electronic component content in automobiles and increased automobile sales worldwide were the positive highlights for the global passive component markets. In specialty markets, the medical electronics markets segment and the commercial aerospace market segment continued to perform well, while defense markets slowed down, with the only exception being positive growth in sub-assemblies for the F-25 Fighter Jet.
The big strain on the passive components markets continued to be centered in the consumer demand shift impacting the computer markets, as customers continued to buy tablets instead of notebook computers and desktop computers, causing overall component consumption in the segment to decline. Additionally the global television set market remained disappointing, as did the market for consumer audio and video imaging equipment which is being negatively impacted by Smartphones, which can accomplish the same goals as consumer electronics devices such as digital still and digital video cameras, game consoles, GPS devices, and MP3 players, which become redundant and not viable with the consumer.
Raw material markets showed excessive volatility in 2014 due primarily to the tensions between Russia and the west in Ukraine, which created rising prices for palladium and nickel, two metals over which Russia has significant control and which are consumed in significant volumes in the passive component industry. There was also a weakening in price for crude oil, which many economists agree is odd; and tied either to a slowing Chinese growth forecast for the year; or to Saudi Arabia’s interest in competing against U.S. shale oil production or to curtail the expansion plans of its neighbor, Iran.
Positive Market Indicators
The positive influences on the market are as follows:
- Continued expansion of the high component content Smartphone market worldwide. Global Smartphone production exceeded 1 billion units in 2014 while production of legacy phones remained in the 800 million-unit range. This had a significant positive influence on global ceramic capacitors.
- Dramatic increases in global production of tablet computers to 285 to 300 million units, which had a positive influence on demand for ceramic capacitors and tantalum capacitors.
- Another healthy year for automobile production, which topped out at an estimated 90 million units worldwide with increased demand for passive components, including ceramic capacitors, tantalum capacitors, and aluminum capacitors.
Negative Market Indicators
The negative influences on the market are as follows:
- The high passive component content notebook computer and desktop computer markets are being negatively impacted by increased sales of tablet computers. This has resulted in declining component sales to the computer markets as a whole. This is having a negative impact on tantalum capacitor sales and aluminum electrolytic capacitor sales, which rely on the computer markets for a significant portion of their revenues.
- Television set markets continued to decline, partly due to television services available through Smartphones making wall mounted TV sets redundant. This is having a negative impact on the aluminum capacitor and DC film capacitor markets worldwide.
- Consumer audio and video imaging product markets have declined because of the success of the Smartphone. The Smartphone is making devices such as digital video cameras, game consoles, GPS devices, and MP3 players redundant. The decline in product sales to the segment is significant and having a negative impact on sales of ceramic and aluminum capacitors.
- Smartphone saturation in established economies will continue to be the growing concern among major vendors of passive components, especially vendors of MLCC who have experienced 11% unit growth rates each year over the past few years as the transition away from legacy phones toward high component content Smartphones fueled demand and kept the machines running. The growth rates appear to be leveling off as Smartphone saturation in established economies becomes a reality.
Month-by-Month Analysis of Passive Component Markets for 2014
- As mexpected, January 2014 showed a month-over-month slowdown in lead times for almost all capacitors, resistors and inductors. The slowdown in the March financial quarter is typical following the holiday buying season of the prior quarter and this does not come as a surprise. Still however, the severity of the slowdown in January was somewhat unusual, and there was a pullback that belied the typical downturn and may be the result of concerns over January financial data regarding emerging economies, particularly China, which was not as robust as previously believed.
- In capacitors, we noted a significant slowdown in lead times for tantalum capacitors, which impacted both manganese and polymer chip types. There was also a slowdown in the H-chip type aluminum capacitors, as well as in the large can aluminum capacitors and the general-purpose radial leaded DC film capacitors. This signified to us a post holiday season slowdown in the computer and power related markets. The only bright spot was in axial leaded aluminum capacitors, which are primarily sold into the automotive segment.
- In resistors we saw a significant slowdown in lead times for thick film chip resistors and nichrome metal film resistors which was the result of the general slowdown that follows the holiday buying season; coupled with supply chain jitters resulting from concern over the health of emerging market economies, especially China.
- Inductors also saw a slowdown in lead times, especially for molded axial and radial leaded inductors, while lead times for ferrite beads and surface mount inductors remained unchanged.
- With respect to the raw material index, prices increased overall and were lead primarily by a significant jump in the price for palladium metal as well as an increase in the price of nickel and silver. Aluminum pricing was also up slightly. Other pricing for such products as copper, zinc, ruthenium and crude oil actually declined slightly, while pricing for tantalite remained unchanged.
- Regardless, the annualized trend line points toward a gradually improving global market for passive electronic components for CY 2014.
- Passive component lead times and demand returned to their previous levels, after showing substantial weakness in January 2014.
- In capacitors, we noted an increase in demand for tantalum and aluminum capacitors, after both product lines showed surprising slumps in demand in January. Demand for ceramic capacitors remained unchanged, while demand for plastic film capacitors showed a slight weakness, especially for axial leaded designs.
- Other resistor products, such as axial and radial leaded designs, showed weakening performance in February 2014 and resistor networks showed no change in demand.
- Inductor products showed an unexpected spike in demand in February 2014, primarily for axial and radial leaded micro-inductors, while other inductive products, namely ferrite beads and chip coils saw no changes on a month to month basis.
- The market continues to be impacted by variations in currencies, especially the yen to US dollar valuations.
- The raw material index for passive components showed a slight decrease of 0.67% in February 2014 lead by declines in nickel, copper and tantalite, with slight increases in pricing for aluminum, zinc, palladium, silver, ruthenium and crude oil.
- Finally, one of our European customers expressed concern over tin availability in 2014, citing that the material is used for soldering and is also (like tantalum) a conflict material which may become in short supply with any upturn in the components market.
- The short-term red flag for the month of March 2014 was the rising price of both nickel and palladium causing a “perfect storm” for the ceramic capacitor industry and shedding light on the growing area of risk assessment for the high tech supply chain. Prices for both nickel and palladium jumped up in March 2014 on the fear of a potential trade embargo between Russia and the West over Russia’s annexation of Crimea. MLCC electrodes are manufactured from either nickel or palladium materials. Russia supplies 41% of the world’s palladium and 17% of its nickel from the Norilsk operations in Siberia. Primary sources suggest that the price for both metals may go much higher before speculators release their stockpiled metals on to the market.
- With respect to lead times there was renewed activity in March, with larger case size MLCC, axial aluminum and axial plastic film capacitors showing increased lead times; and carbon film, SIP and DIP networks and larger case size thin film chip resistors also showing increased lead times; while tantalum capacitor lead times relaxed back down to normal, as did thick film chip resistors following their spike in February due to Israel calling up reserves.
- Movements in the component market suggest increased activity in March in automotive and lighting and telecommunications infrastructure end-use market segments.
- Also of interest is the fact that even though nickel and palladium raw material prices increased, the prices of almost all other materials, including copper, aluminum, zinc, silver, tantalite and crude oil showed month-over-month declines in price, which suggest an underlying weakness in the global economy.
- While western vendors showed revenues as expected in the March 2014 quarter, Japanese vendors continued to outperform due to the weakening yen. Both Murata and TDK continued to forecast robust expectations for their full fiscal year.
- Nickel and palladium are both used as electrodes in MLCC. Nickel prices increased by 29.3% since February 2014 and palladium prices have increased by 9% since February. This is due to the threat of a trade embargo between the West and Russia over the annexation of Crimea and the threat of invasion in Ukraine.
- Lead times for capacitors, resistors and inductors showed little or no change in April 2014 on a month-to-month basis, which suggests a certain stability in the market.
- In late April, Paumanok was contacted by the United States Department of Justice, Anti-Trust Division. The attorneys from the USDOJ have authorized the following statement- “The USDOJ is conducting an active investigation into the trade of capacitors; and while they can share no information regarding what this entails, they do operate inside the anti-trust division, and that has historically meant that they are investigating allegations of price fixing.” Paumanok has also been contacted by more than one private attorney in California seeking information on capacitor pricing going back more than two decades.
- We noted significant spikes in demand activity in the global passive component market in May 2014, especially for capacitors.
- Specific products that showed increased demand activity in May included EDLC Supercapacitors, Ceramic Capacitors, Tantalum Capacitors; Plastic Film Capacitors, Thick Film Chip Resistors, Thin Film Chip Resistors and Ferrite Beads.
- The specific passive component products experiencing an uptick supports an increase in demand from the wireless handset, computer, automotive, telecom infrastructure, power and lighting end-use market segments for May 2014.
- There is less activity in the resistor and inductor segments, but still, increased demand for ultra-small 0201 thick film chip resistors and large case size thin film resistors, as well as ferrite beads is noted; as well as a spike in demand for multiple MLCC case sizes; tantalum chip case sizes and axial and radial PET type film capacitors.
- Japanese vendors cited increased revenues from the automotive sector, renewed revenues from the inverter sector and the weak yen as reasons for revenue growth.
- Raw material prices continue to increase, growing by 4.73% in May compared to April, and lead by increased prices for nickel and palladium because of tension in Ukraine, and now for copper because of the taxation policy of exported copper from Indonesia, which has sent the countries copper smelters into turmoil and limited exports.
- Finally, the investigation into the capacitor industry which is reportedly being developed by the U.S. Department of Justice Anti-Trust Division and China’s National Reform Commission is well underway.
- The overall market for passive electronic components continued to improve in June after its impressive spike in global activity in May. The lead-time extensions noted in May, remained in effect in June, with some components noting additional extensions in lead times in June on a month over month basis.
- Raw material prices on the other hand, began to relax back down after two months of feverish activity related to the threat of a trade embargo between Russia and the West over Russia’s involvement in the turmoil in Ukraine. Prices for two key materials- Nickel and Palladium both declined on a month-to-month basis in June, giving us reason to believe that the threat of any real consequences to Russia over the annexation of Crimea are going to be limited and the crisis is winding down.
- Also of important note was Vishay’s purchase of the tantalum capacitor assets of Holystone, which are the former Hitachi AIC capacitor operations. Once again, Vishay astounds at their ability to acquire choice assets for pennies on the dollar. Raw material suppliers of tantalum ore and powder were not happy because too much consolidation in the industry is squeezing profitability.
- MLEX continued to publish newsletters describing the international probe into price fixing in the capacitor industry. MLEX has cited that many Japanese manufacturers have now been raided by government officials, after confirming that raids had occurred in Korea and China. The MLEX article cites that the governments of Japan, U.S., China and Korea are working together on this problem. MLEX further states that the allegations only include tantalum, aluminum and film capacitors because their “whistleblower” was only involved in those dielectrics at the time of the reported violations.
- Currency translations continued to play a major role in the valuation of the passive component industry in July 2014, with the valuation of the yen to dollar continuing to favor the Japanese vendors. Also, the decline in the value of the Korean won had a negative and unforeseen impact on the MLCC sales at Korean component vendors.
- Murata noted strength in the market for Chinese wireless handsets, which was also supported by Yageo and Walsin MLCC sales in the region, and continued growth in the automotive electronics sector. Murata also reported growth in revenues coming from the computer and peripherals segment (with an increase in demand from notebooks, desktops and tablets) of the market as well as from the home theatre market, with emphasis upon MLCC sales for the cable set top box markets.
- In July 2014 the global capacitor market showed signs of remaining unchanged month-to-month and demonstrating a slight slowdown, with most product lines remaining unchanged with respect to lead times from the prior month, except for axial leaded aluminum capacitors (consumed in the automotive sector), EDLC supercapacitors and film chip capacitors showing signs of slowing down in terms of demand. The only product line that showed an increase in demand for July 2014 was the snap-mount aluminum capacitor, which is consumed in light industrial applications and in desktop computers.
- Demand for resistors remained unchanged on a month-to-month basis in July 2014. For the first time in two years we saw no changes in the supply or demand equation in resistive products.
- Lead times for discrete inductors showed an increase in July 2014, driven by an increase in demand for the axial and radial leaded inductor products.
- A majority of the top vendors of passive components reported their financial information for the quarter ending June 2014. While the market was strong, it was not as strong as anticipated. We now estimate that the value of passive component demand increased by about 4.1% in constant U.S. dollars for June 2014 (after currency translations).
- The Passive Component Raw Material Index (which covers feedstock pricing for many of the primary raw materials consumed in the production of passive electronic components) showed an INCREASE of 5.093% on a month-to-month basis in JULY 2014, following two months of intense market activity. The increase in raw materials pricing can be attributed to the turmoil in Ukraine and the increased sanctions against Russia, who is a major vendor of nickel and palladium.
- As of this August 2014 monthly report all of the top vendors of passive components reported their financial information for the quarter ending June 2014. While the market was strong, it was not as strong as anticipated. So the outlook for passive component sales is dependent upon product type, end-use market segment and regional access; but even then, within specific growth markets, such as handsets, proper customer access is key.
- In August 2014 the global capacitor market demonstrated a slight slowdown with most product lines remaining unchanged with respect to lead times from the prior month, except for EDLC supercapacitors snap-in aluminum capacitors, and low ESR “A” case tantalum chip capacitors. EDLC supercapacitors and Low ESR “A” Case tantalum chips showed an increase in lead times, while snap-in aluminum capacitors had a significant drop in lead times on a month-to-month basis.
- Lead times for resistors remained unchanged on a month-to-month basis for the second month in a row, except for three types of thick film chip resistor, the 0603, the 0805 and the 1206, which demonstrated a slowdown in lead times on a month-to-month basis. All other linear resistor products remained steady-state for the month of August on a month-to-month basis.
- Lead times for discrete inductors showed an increase again in August 2014 after an already documented increase in July 2014, driven by an increase in demand for the axial and radial leaded inductor products.
- The Passive Component Raw Material Index (which covers feedstock pricing for many of the primary raw materials consumed in the production of passive electronic components) showed a decrease of -1.8%% on a month-to-month basis in August 2014, following three months of intense market activity. The prior increase in raw materials pricing can be attributed to the turmoil in Ukraine and the increased sanctions against Russia, who is a major vendor of nickel and palladium, however in August 2014 the nickel price declined. Palladium prices remain elevated, but the drop in the nickel price was enough to affect the entire index for the month.
- Base metal material prices decreased by 1.9% in AUGUST 2014 on a month-to-month basis. All based metal commodities, including nickel, copper, aluminum and zinc, spiked in July as a result of the renewed tensions in Ukraine and the increased in sanctions against Russia. However, in August it seems as if the market is shrugging that off as tensions de-escalate and the world looks to other problems.
- Precious and rare metal prices increased by 1.2% in August 2014 following a three month increase in prices for palladium based on increased tensions between Russia and the West. Palladium prices increased an additional 1.5% in August on a month-to-month basis. Ruthenium prices remained unchanged at $68.00 per oz; and tantalum ore prices increased slightly (by one dollar per pound). Silver prices also declined 4.9% in August.
- The Passive Component Raw Material Index (which covers feedstock pricing for many of the primary raw materials consumed in the production of passive electronic components) showed a significant decrease of -6.4% on a month-to-month basis in September 2014, following three months of intense market activity. The prior increase in raw materials pricing can be attributed to the turmoil in Ukraine and the increased sanctions against Russia, who is a major vendor of nickel and palladium, however in September 2014 the nickel price declined, as did the prices for every raw material analyzed in the index, with base metal pricing declining by a collective 10.3%, and precious and rare metal pricing declining by a collective 8.9%.
- In September 2014 the global capacitor market demonstrated only a slight upturn with most product lines remaining unchanged with respect to lead times from the prior month, except for specialty ceramic capacitors (high voltage) and plastic interference suppression capacitors, both of which are consumed in the power electronics (Industrial) end-use market segment. There was a slowdown in demand for the axial leaded aluminum capacitors which are usually consumed in either automotive or lighting.
- However, lead times for resistors showed excessive activity in September 2014, on a month-to-month basis and much to our surprise (because there was little comparable activity in the capacitor space, and these markets usually mirror each other when it comes to lead times). Activity was across the board- which suggests a restocking of resistors at the distribution level. We saw an increase in lead times for the 0603 thick film chip resistor; the bulk metal foil resistor, the array, the coated SIP network, the molded DIP and the molded SIP network as well as increased lead times for the thin film 0603 and 0805 chip resistors as well.
- Lead times for discrete inductors showed no change in September 2014 after steady increases in July and August 2014 which was driven by an increase in demand for the axial and radial leaded inductor products.
- Primary sources in the passive component supply chain report economic volatility resulting from (1) fears of contracting Ebola and the potential steps that might be taken to eradicate the virus; (2) the sudden and unexpected downturn in the German, UK and French economies; the (3) churn rate in the global high-tech economy, and (4) the recent forecasts for growth given by the collective Japanese vendors of passive components for FY 2015.
- Primary sources interviewed at the General Assembly event with their headquarters in the German market noted that industrial production in the September quarter slowed down considerably. And the December 2014 quarter was expected to be flat on a quarter-to-quarter as well. And while primary sources also noted that they did not expect Germany to enter into a recession, they were dialing back their estimates for Germany and Europe as a whole for FY 2015 (Germany is Europe’s largest economy).
- Primary sources from the United Kingdom also report a general slowdown in their local economy and have also dialed back their estimates for growth in FY 2016- and while the UK economic growth is now better than that of Germany for the 2015 FY, the country is concerned about the Eurozone economy in general; the conflict in Ukraine and the uncertainty of the upcoming political election in the country.
- In France the economy is also proving to be extremely challenging. Growth has slowed considerably in the September 2014 quarter and this is reflected in and influenced by the high unemployment rate in the country. The high tax-rate for individuals, restrictive labor laws and the aggressive stance toward taxation of businesses have undermined the potential of meaningful economic growth in the both the 2015 and 2016 fiscal year.
- Another truly surprising development was the announcement that the United States Defense Logistics Agency would restock part of its tantalite stockpile by 2016. The volume of tantalite the USDLA will purchase is an estimated 50,000 pounds, however, the study that resulted in the stockpiling effort noted that the USDLA would require more than 600,000 pounds of tantalite to meet its annual defense related needs. The spokesperson only noted that the volume of consumption that had been earmarked to date is 50,000 pounds. It was also noted that the tantalite could only come from US or ally sources and not from the Democratic Republic of the Congo because they were not a NATO member state; which is odd because the Dodd-Frank Act’s section on conflict minerals targets the activities in the Congo directly.
- Raw material pricing continued its decline in October, lead by drops in nickel and palladium, pricing which we saw drop in the September month as well. This is in response to the world’s disinterest in Russian actions in Ukraine.
- The weak yen continues to have an impact on the quarter-to-quarter valuations as the data is converted into U.S. dollars.
- Also, most of the growth in 2014 once again centered around demand for the high capacitance MLCC and this is indicative to revenue increases at Taiyo Yuden and Murata and also be suggestive of access to prime contracts in tablets and handsets.
- Global lead times for all passive components remained largely unchanged in November 2014, and the market demonstrating a slow decline in December.
- Some additional month-to-month activity was observed in the thin film resistor segment, suggesting some activity in the specialty markets in wireless base stations.
- The Passive Component Raw Material Index (which covers feedstock pricing for many of the primary raw materials consumed in the production of passive electronic components) showed an increase of 5.4% on a month-to-month basis for November, reversing the downward trend evident since August. The turnaround was most noted in nickel and palladium, which suggests this was in response to the latest round in Russian tensions with the rest of the world over Ukraine.
- A flurry of buying activity occurred during the first half of the month as customers exhausted their budgets and placed orders for capacitors, resistors and inductors.
- This activity in turn benefited demand for raw materials consumed in passive electronic components.
- Overall the year proved extremely beneficial for Japanese vendors due to the weak yen versus the U.S. dollar. American, Chinese, Korean and European passive component vendors reported anemic results, while Japanese manufacturers reported some of the best quarters Japanese passive component vendors have ever seen.
- The overall outlook for 2015 and 2016 remains positive.