Introduction: Markets Take a Step Back
During the week of October 12, 2014, I attended the 55th General Assembly of the Tantalum–Niobium International Study Center held in bustling Times Square Manhattan. This year’s assembly was special for me as I was made a delegate and my firm became a “member company.”
What I enjoy most about the General Assembly meeting is the access to the complete tantalum supply chain; from miners to materials processors; component manufacturers to design engineers; lobbyists, financiers and government officials; and the ability to tap into each level of the supply chain to gather primary intelligence.
The general takeaway from the discussions I had at this event was one of general concern over the (1) global 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.
Ebola Fears at the Forefront
This year’s General Assembly meeting was a bit different than those in the past and there was a negative tone emanating from the crowd; brought partly by the fear of the devastating and seemingly unstoppable Ebola virus, but also because the European delegates were warning all those who would listen that the key markets in Europe were taking a turn for the worst; and the component vendors were warning that the churn rate in the high-tech economy was having an anemic affect on global business.
The African miners, who specialize in mining hard rock tantalite in far away and exotic places such as the Democratic Republic of the Congo, Sierra Leone and Rwanda were wearing their hearts on their sleeves and their concerns in their actions by refraining from shaking hands, with at least one poignant comment about how the traditional Western business practice of greeting each other was far from sanitary and that we should all adopt the Asian practice of bowing instead. When pressed, the miners from central Africa acquiesced and noted how the majority of them had fled their respective countries for European enclaves months ago. Many smaller mining operations and prospecting activities had been idled, simply over the fear of potentially contracting the Ebola virus.
One mining firm noted to me that local security on the ground for the Westerners was provided by elements of the local police departments and it was the police departments who were also first responders when families reported that a loved one was sick with the Ebola. In the end, the message I received from the African attendants at the General Assembly meeting was that the Ebola virus was devastating the local economies in Africa, and preventing the continued mining of hard rock ore (had this happened at a high point of demand for tantalite there may have been a global shortage of key raw materials).
The general consensus among the African miners interviewed at the General Assembly meeting was that it was highly logical that the expansion of the Ebola virus will be checked in the next few months as the cold weather keeps people from congregating; and therefore mitigates the spread of the disease. Let us hope that this is more than mere hyperbole.
Europe Dials it Back
Another pressing issue affecting the global economic landscape as we enter into the second quarter of the 2015 fiscal year (Ending March 31, 2015) is the fragile European economy. 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.
Churn in the High Tech Economy
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 have been the positive highlights for the global electronic component markets in FY 2014 and FY 2015. In specialty markets, the medical electronics markets and downhole pump oil and gas electronics markets continued to perform well, while defense markets slowed down, with the only exception being positive growth in sub-assemblies for certain fighter jets. Commercial aircraft markets also remained somewhat positive in both fiscal years.
The big strain on the electronic component markets comes in the transition in the computer markets, as customers buy tablets at the sake of notebook computers and desktop computers, causing overall component consumption in the segment to decline. Additionally the global television set market remains disappointing, as does 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 in wake of the Smartphone and not necessary anymore for the consumer.
Summary of Positive Market Indicators
The positive influences on the market are as follows:
- The continued expansion of the high component content Smartphone market worldwide.
- Dramatic increases in global production of tablet computers.
- Another healthy year for automobile production and increased electronic content per automobile.
Summary of 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.
- Television set markets continue to decline, partly due to television services available through Smartphones making wall mounted TV sets redundant. However, it should be said that new developments in television sets, including new shapes and higher resolution products, seems to be gaining traction and may have an unexpected positive impact on component sales in FY 2016.
- 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 electronic components.
Japanese Vendors make Detailed Forecasts for FY 2015
The Japanese vendors interviewed at the General Assembly meeting in Manhattan in October also pointed toward the year-over-year forecasts made by the publically traded passive component companies in Japan, which project an average annual rate of growth of 7.3% in yen value on a year-over-year basis between FY 2014 and FY 2015. When converted into U.S. dollars, due to the strength of the dollar to the yen, this value growth drops down to only 3.1% growth rate for passive component sales on a year-over-year basis for Japanese vendors. And since the Japanese vendors control such a majority portion of the global passive component markets, their forecasts are a good estimate of the actuality of growth for the market as a whole on a year-over-year basis for FY 2015. In Japan the high growth components continue to be the high capacitance ceramic chip capacitors and (surprisingly) and to a smaller extent, the aluminum electrolytic capacitors; offset by stagnant markets in tantalum capacitors and plastic film capacitors. Plastic film capacitors and large can electrolytic capacitors are largely dependent upon government direct investment in infrastructure, which is certainly in question going into FY 2016 given the weakness in the European economy.
Summary and Conclusions: FY 2015 and 2016 Outlook
- At the beginning of the December 2014 quarter, primary sources in the industry have focused their attention upon the potential global economic impact of the fear over the Ebola virus emanating from Africa. This has had a negative impact on hard rock mining in central Africa as people shy away from congregating. The major concern remains the continued expansion of the virus globally and the terror that the disease would have on the global population as well as curbing typical behaviors.
- The sudden slowdown in the German, UK and French economies; and the Eurozone in general in the September quarter and the revised expectations for the December 2014 quarter and the fiscal year 2015 as a whole for the Eurozone, has caused many (including Paumanok) to downgrade their global forecasts for component consumption.
- The changing markets in the high tech economy also cause a reason for pause and caution as we enter into FY 2016. The saturation rate of the Smartphone in global populations will cause a slower growth rate in unit sales for electronic components and the value of component revenue will continue to be mitigated by increased production of tablet computers at the expense of higher component content notebook and desktop computers. The television set market remains a true question mark, as new products seem to be gaining traction on a global basis. What remains popular continues to be the automotive segment; the medical segment, the oil and gas segment and certain aircraft markets, but these are too small to have any major impact on the overall supply of components.
- Japanese vendors forecast a 7.3% growth in yen value on a year-over-year basis for FY 2015, although due to the strength of the U.S. dollar this gets cut back to only a 3.1% growth rate when we translate the currency. This growth rate will be lead by high capacitance ceramics; followed by aluminum capacitors; and limited growth potential if at all) for tantalum capacitors and plastic film capacitors.
- Subsequently, the forces at work both inside and outside of the high-tech economy seem to be creating significant headwinds to growth. Therefore it is my conclusion that the growth rates forecasted for FY 2015 and FY 2016 should be dialed back to better reflect the market realities in which we find ourselves today.