Expecting a gradual recovery later this year, capacitor suppliers and their distributors report spot buying of some capacitors and say inventories of popular ceramic and tantalum parts -- inflated by capacity increases in response to last year's shortages -- are beginning to decrease.
Capacitor vendors and their channel partners are deriving some hope from a June report by the Electronic Components Association in Arlington, Va., that component orders, including for capacitors, have bottomed out and will show a slight upturn late in the second half.
"Capacitor orders remain low, but we see inventory levels gradually being drawn down, particularly at our distributors," said Sandy Beck, vice president of marketing at Kemet Electronics Corp., Greenville, S.C. "The inventory will eventually be exhausted and orders will recover, but I wish I knew when."
"The worst is over," said Richard Schuster, president of NIC Components Corp., a subsidiary of distributor Nu Horizons Electronics Corp. in Melville, N.Y. "We've managed to reduce inventories better than I thought."
There are signs of buying activity, Schuster said. "We see spot buying on multilayer ceramic chip capacitors having less-common values-for instance, 27 and 39pF."
Gene Conahan, vice president of passive products marketing at distributor TTI Inc., Fort Worth, Texas, said, "We're seeing a bit more demand for large- case-size capacitors like 1206s and 1201s. However, there's still a glut of 0402 and 0602 parts due to weak demand in the wireless phone industry."
But even if demand picks up, suppliers worry that prices that have fallen by at least 10% in the first half of the year could fall further as OEMs try to get them back down to what they paid before last year's shortages.
Prices could have already fallen further, but up until now capacitor suppliers have been able to pass on high material costs for tantalum and palladium to OEMs due to shortages. But these shortages have eased, giving OEMs additional leverage.
Customers are already taking a wait-and-see attitude on prices, according to John Denslinger, senior vice president of sales at Murata North America Inc., Smyrna, Ga. He noted that requests for quotes at Murata for the first half of the year have already exceeded last year's total, while orders have not witnessed an upswing.
Added pressure is coming from component exchanges selling unused parts from OEMs and contract manufacturers at fire-sale prices to rid themselves of excess inventory, said Glyndwr Smith, senior vice president and assistant to the chief executive at Vishay Intertechnology Inc., Malvern, Pa.
"The problem with that practice is that it is unrepeatable-buyers won't necessarily be able to get those prices the next time," Smith said.
Meanwhile, capacitor makers are trimming their operations.
"Most suppliers are producing at under 50% of capacity," said Kemet's Beck, whose company recently laid off 2,000 workers.
Said Vishay's Smith: "Our mantra is that you have to make money at the levels you're manufacturing at."
But even after the expected industry recovery, the volatile supply/demand cycles will likely reoccur because no one can agree on how to resolve them, according to capacitor manufacturers.
For instance, suppliers have long advocated long-term supply agreements setting prices and delivery. However, OEMs, distributors, and contractors may not want to be locked into such agreements because "there's always someone looking to make a better deal," Murata's Denslinger said.
Both distributors and suppliers say that even if third-party managed inventory programs increase in popularity, supply chain problems will still exist because everyone relies on OEM forecasts to guide their activities.
That represents a paradox for Vishay's Smith. "We can't refuse OEM orders based on their forecasts. However, if 10 wireless phone makers each project having 30% to 40% of the market, we must conclude someone is being overly optimistic."