High prices, low supply: the near future of passive components

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The passive components market currently faces never-before-seen shortages and lead times, with some prices at all-time highs and purchasers short on options for immediate supply demands.

Passive components are those components which require no source of energy to perform their intended function. Passive components include resistors and capacitors, and are used in everything from smartphones to electric vehicles.

EENewsEurope.com reports that, for some components, prices are up more than 75%.

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Despite the cooling effect this shortage has had on industry, and ongoing concerns over the supply of passive components, relief may come sooner than industry actors think.

Global shortage: How did we get here?

A confluence of both forward-facing and historical trends are driving the price of passive components to these all-time highs.

Cryptocurrencies, electric vehicles, and gaming consoles have all contributed to the recent friction seen in ceramic multi-layer ceramic capacitor (MLCC) markets.

For aluminum capacitors in particular, the cost of raw materials has been on the rise for more than two years now, a trend which started before the U.S.-China trade disputes seen today. Since late 2015, aluminum prices have risen after increased demand in new markets. From December 2015 to September 2018, the three-month futures price of aluminum rose roughly 40%, from $1,500 USD/t to $2,100 USD/t.

Industry experts sigh

Supply Chain Manager Jenna Heath of Chemigraphic explained in a public statement that ongoing shortages should be expected.

“Having once been easily accessible, staple electronic components, these parts have seen a huge increase in demand due to growing markets such as smartphones and electric vehicles. As a result, other industry sectors are seeing a huge squeeze on the availability and delivery times surrounding these components, as well as adverse pricing trends.”

The global smartphone market faced declining shipments for the second straight quarter in Q1 2018 due to more consumers opting to keep their old devices, but it still contributes to rising component costs because of the producer ecosystem’s fragmentation.

Ms. Heath noted in her statement that Chemigraphic projects a 12-month lead time on its new passive component orders, despite front-loading inventory beforehand.

“[W]e are asking our customers to work with us to stay on top of demand and allow us to forward plan as far in advance as possible.”

Where to buy in this new market?

Across the board, passive components manufacturers are hampered by these market conditions.

Japan has taken this supply-demand mismatch opportunity to begin stabilizing growth in passive components output. The latest June figures from the Japan Electronics and IT Industries Association show a to-date increase of 9.9% in production year-over-year for Japanese manufacturers. Outsized revenue improvements have accompanied this productivity increase.

Japan’s European manufacturing peer, Germany, has had relatively less growth in passive components manufacturing. Georg Steinberger, FBDi Chairman, said to Evertiq.com that while Germany may have good insulation from the US-China trade dispute, other factors have negatively affected its ability to meet demand expectations. “[E]ither the backlog is growing or the cancellations have increased. This will be reflected in the overall year 2018, we expect a moderate growth in the one single-digit range at the best.”

Despite their progress, Japanese manufacturers have faced declining market share against other Asian competition since 2008 (see Slide 2 of this Japanese Ministry of Economy, Trade and Industry presentation). Part of this decline – though not all of it – can be attributed to a weaker Yen to the US Dollar in certain metrics since 2012. Japan’s medium-sized manufacturers nevertheless remain competitive, per the JEITA report.

Across Asia, Hyundai Motor Investment & Securities separately reports that the top four MLCC manufacturers’ capacity is projected to grow 13.1% YOY from 2018 to 2019.

Industry giant Murata plans to cut 50% of production capacity for conventional MLCCs in 2018, to make room for the MLCC types typically demanded by electric vehicle manufacturers. Notwithstanding the damage its stock price has taken over this move, the shift in production marks a corporate strategy consistent with the changing marketplace.

Substitution may be an option for companies in certain industries with enough innovation and room in their production schedules. Smartphones and other small devices likely require the small-form of MLCCs for any design, and other industries may be likewise limited in the type of capacitor they use, but substitutions can still merit investigation. While the exact viability of substitutions will vary, the company expecting continued difficulty in the long-term should consider their options.

Substitution may not be necessary, though, as the conditions which gave rise to this mass shortage turn down and manufacturers (such as Murata) mature to meet these new needs.

Expect passive component growth to slow in the mid-term

In the mid-term, even amid Q3 of 2018, market actors can expect the rapid growth seen during the first part of this year in passive components to slow.

Fundamentally, the smartphone market’s global demand slowdown will eventually depress the cost of many MLCCs. Assuming an optimistic trade war outlook, aluminum product costs should also improve marginally.

A more mature market, with better production parity to these new demands, should reign in passive component prices in the near future. Demand has outpaced supply in the past several years, and manufacturers are revamping their production lines to stay on top of these new orders. In time, passive components will likely grow into the contours of  global demand and keep normal prices.

What do you think? Are passive component prices due to normalize, or will there be more price anxiety over the horizon? Comment below.