Quarterly Market Update for Passive Components: 2016

Introduction to the December 2016 Quarter

The pressure is on in the volume of demand for passive components as we enter into the December quarter of 2016; however, currency headwinds continue to make it seem as if the industry has to sell more parts for less money year-after-year.

CAPACITOR LEAD TIMES continued their upward movement as demand for three of the primary dielectrics remained unchanged, but unit demand for ceramics uncharacteristically increased leading us to believe that capacity utilization rates for multilayered ceramic chip capacitors (MLCC) had finally pushed above 90% in volume globally, which would make sense given the extreme fluctuations in the dollar, yen and won over the past 12 months. The upward cycle in demand is in response to distributors preparing for the Holiday buying season in the West in what is clearly a strong build season for wireless handsets and other consumer electronics related to the internet of things and increased global connectivity.

This spike in MLCC lead-times (see monthly report), noted in the chart below, came in the same month as Murata Manufacturing, the world’s largest capacitor manufacturer- announcement that they had decided to expand their ceramic dielectric material production capabilities in Japan in the same month they announced the purchase of IPDIA, a French manufacturer of integrated passive devices and embedded silicon capacitors. This can be translated into a an expectation of continued growth in individual discrete ceramic capacitors, but also an expectation that volumetric efficiency will reach beyond the capabilities of existing ceramic green sheet production technology and they wish to be prepared.

ALUMINUM ELECTROLYTIC
Aluminum electrolytic capacitor lead times remained unchanged for all tracked products across the board for the month of October 2016 (On a month-to-month basis). However the reader should understand that we view the aluminum capacitor unit demand as being up since June and that the market is maintaining higher levels of demand than before. How this transfers into market value will remain to be seen as 68% of the world’s aluminum capacitor supply reports in yen and the exchange rates have fluctuated wildly over the past 12 months.

CERAMIC:
Ceramic capacitor lead times INCREASED in October on a month-to-month basis as demand for all case sizes showed uncharacteristically high unit demand (which we perceive as finally pushing up against the global ability to produce MLCC at such high volumes- which are now approaching 2 trillion pieces. The reader should note that this is significant because in prior months we have not seen any movement as MLCC remained clearly in their 85% to 90% capacity utilization, but since June we are seeing some real activity in demand for ceramic capacitors, which suggests a higher than normal build-out which is most certainly the impact of the smartphone more rapidly being the only phone available on a global basis.

TANTALUM
After a short-lived and exciting run in unit demand for tantalum capacitors in the summer, we now see tantalum capacitor demand remaining steady, but albeit elevated in unit demand from prior months. Reports from the tantalum conference (TIC) held in Toulouse, France this month report much gloominess and a problem of not trying to grow tantalum into new markets. But in electronics we saw a spike in unit demand coming from the satellite and defense industries which improved the performance of some specialty vendors with Mil-Spec and Space approvals.

PLASTIC FILM CAPACITORS
Plastic film capacitors, which are largely associated with line voltage equipment market, have been stagnant in October on a month-to-month basis, and continue to reflect too much vertical access to industrial, power, renewable and lighting end-markets that are unfortunate victims to low fossil fuel prices. This market should begin moving again in mid-2017.

RESISTOR LEAD TIMES

Resistor lead times were also up in October 2016, primarily for thick film chip resistors, which corresponded quite well with an increase in demand for MLCC, which are the sister component of thick film chip resistors in terms of extremely high volume consumption, especially in smartphones. This increase in demand is coming from the wireless handset build for the December Holiday season in the U.S.

THICK FILM CHIP RESISITORS
Thick film chip resistors showed a large scale increase in unit demand for October 2016 on a month to month basis with all case size from 0402 to 1206 and larger showing a significant increase in unit demand and extended lead times as a result. We believe that since a similar event happened in MLCC that this is related to demand for wireless handsets for the seasonal build.

AXIAL AND RADIAL LEADED RESISTORS
In October on a month-to-month basis we noted that demand for nichrome film axial leaded resistors increased in accordance with expanding lead times, while demand for power wirewound resistors relaxed back down. Other throughole type resistors remained unchanged for the month- including carbon film, metal foil and tin oxide. We associate many of these specialized resistors with the industrial end-use markets which have underperformed in recent years.

RESISTOR NETWORKS
Demand for all types of resistor networks relaxed back down in October 2016 after an increase in demand noted in September 2016. Networks such as the DIP and the Molded SIP saw decreased lead times in October 2016. The legacy products- molded SIPs for example, continue to be in volatile supply, resulting in unusual swings in market price and availability. Many of the traditional resistor networks find their home in traditional wireline communications networks for central office subscriber line interface cards used in switches.

THIN FILM CHIPS
Thin film chip resistors saw no increase in lead times in October 2016 and in fact the 0603 thin film chip saw a decrease in lead times for the month of October. However, for most of the year demand for thin film chip resistors has been elevated due to increased demand for applications at higher frequencies where new products in the intelligent vehicle highway system and automotive connectivity are emerging. There has also been increased demand for thin film chips consumed in medical electronics during the year.

INDUCTOR LEAD TIMES

Discrete inductor demand has remained elevated for some time. In October and on a month-to-month basis, there have been no additional increases in demand, however, the reader should note that chip coils and multilayered ferrites are in large demand for use in modules consumed in smartphones and devices connected to the internet of things, with wearables driving down size requirements for components creating new opportunities in nanotechnology of engineered electronic materials.

CURRENCY HEADWINDS

So much continues to depend on currency valuation and the rapidity by which it changes, especially between the dollar and yen. In the September 2016 Quarter the strengthening of the yen to the US dollar brought their respective currency valuations back into historical parity, however, the forecast for the December 2016 quarter is now up to 105 yen per USD which means the value of the yen is weakening to the US dollar and will impact revenues again in the December 2016 quarter. The Korean Won also weakened against the US dollar in October, while the New Taiwan Dollar remained unchanged.

RAW MATERIAL INDEX

The global passive component raw material index declined by 2% in the month of October as precious metals and rare metals took another drop in price on a month-to-month basis lead surprisingly by a drop in the price of palladium per troy ounce.

PRECIOUS METALS
The decline in the palladium price from September 2016 to October 2016 was substantial with price per Troy ounce (Toz) declining from $703 USD per Toz to $641 USD per Toz. Palladium is still used in specialty MLCC electrodes and its price fluctuation can impact price and availability of finished MLCC. The ruthenium price also weakened, as did the tantalite price, as well as the silver price. Ruthenium is the active ingredient in thick film chips and networks, while tantalite is the ore that is converted into powder and wire and consumed in the anodes of capacitors. Silver is also consumed in the terminations of certain types of MLCC and chip resistors. The engineered electronic materials business is considered a value-added segment of the global metals and ceramics industries. Many precious metal prices were reacting to an increase in crude oil prices which went from $44.00 US Dollars a barrel to $51.00 US dollars a barrel during the month.

BASE METAL PRICING
We are noting significant price declines on a month-to-month basis for base metals in nickel and copper, however, prices for zinc and aluminum increased slightly.

OVERALL MARKET CONDITIONS

We see the overall passive electronic component market up in unit shipments in 2016 because of increased demand for capacitors, especially MLCC and tantalum capacitors during the year, as well as thick and thin film chips, ceramic and ferrite inductors, and specialty resistors such as NTC thermistors, polymer PTC thermistors and chip varistors. In terms of value growth however, we caution that currency headwinds will negatively impact the same type of growth in value.