Tantalum powder suppliers are denying requests by several major capacitor makers to renegotiate multiyear "take or pay" contracts signed at the height of the last component shortage, putting severe pressure on their already depressed margins.
Three of the largest tantalum capacitor suppliers -- AVX, Kemet, and Vishay -- are obligated to purchase specific quantities of tantalum powder at high, fixed prices from two companies-H.C. Starck Inc. and Cabot Performance Materials Corp.
But as the average price of tantalum capacitors falls 10% to 15% a quarter, vendors said it will be difficult to sustain another period of high manufacturing costs if powder suppliers don't budge. As a result, suppliers expect tantalum capacitor prices to rise, forcing OEM and EMS customers to absorb the expense.
"We're right at the level where the ability to maintain acceptable margins is threatened," said Glyndwr Smith, senior vice president and assistant to the chief executive at Vishay Intertechnology Inc., Malvern, Pa. Vishay last year posted a third-quarter sequential decline in its gross- profit margin, which plummeted to 19.4% from 31.5%.
Falling prices, falling profits
Average selling prices of tantalum capacitors have continued to erode, dropping to 10 cents from 12 cents in the fourth quarter of 2001, according to Shawn Wood, an analyst at iSuppli Corp., El Segundo, Calif.
"There's a lot of pressure to address tantalum supply contracts," said John Gilbertson, president and chief operating officer of AVX Corp., Myrtle Beach, S.C., in a recent conference call with analysts.
AVX's gross-profit margin decreased to 8.5% in the latest quarter, compared with 9% in the third quarter and 18.5% in the second quarter of 2001, according to estimates from Needham & Co. Inc., New York.
Falling price tags and excess raw materials have also sharply reduced margins at Kemet Electronics Corp. In its most recent fiscal quarter, ended Dec. 31, the Greenville, S.C., capacitor supplier reported it had a year's worth of tantalum powder, said David Maguire, chairman and chief executive, during a recent analysts conference call.
Maguire expects capacitor prices to fall another 10% in the quarter before leveling off at midyear, when he expects rising end-market demand to boost capacitor shipments and reduce material inventories, perhaps alleviating margin pressures.
Kemet's gross-profit margin fell for the third consecutive quarter, to 15.8% from 16.7%.
While capacitor suppliers declined to divulge the terms of the contracts they have signed, Sandy Beck, vice president of sales and marketing at Kemet, said: "We're being obligated to purchase tantalum powder for much higher than market prices."
Two years ago capacitor vendors forged multiyear contracts with H.C. Starck, Newton, Mass., and Cabot, Boyertown, Pa., to ensure stable delivery of tantalum powder to meet shortages of tantalum capacitors used in products such as wireless phones.
Powder suppliers purchase tantalum ore to process into powder under long-term "take or pay" supply agreements with tantalum mines. The largest mine is Sons of Gwalia Ltd., a western Australia company that controls about 75% of the world's tantalum reserves, according to the U.S. Geological Survey's study in January 2001.
The study showed that high demand and shortages caused tantalum ore prices to skyrocket from an average of $34 a pound in 1999 to $160 a pound in 2000, about the time many of the agreements were brokered.
But by the end of 2001, falling demand and increased supply dropped ore prices to an average of $37 a pound, the spokesperson said.
Noting that tantalum ore prices have come down while powder prices haven't, Vishay's Smith said: "We have found so far that negotiation with the powder suppliers has not been very effective."
Dennis Zogbi, an analyst at the Paumonok Group, Cary, N.C., said one of the two major powder suppliers was holding suppliers firmly to the ironclad agreements. He declined to identify which one, but said the company "has a stake in a major tantalum ore supplier."
Sons of Gwalia lists Cabot as a major shareholder on its Web site.
An unidentified industry analyst confirmed that Cabot, which supplies more tantalum powder than H.C. Starck, was balking at requests to renegotiate contracts.
David Lewis, a senior marketing analyst at Cabot, confirmed that the company is a shareholder in Sons of Gwalia, but denied that it is refusing to renegotiate the supplier agreements. "Of course it's possible to renegotiate these contracts," he said, adding that talks were in progress.
H.C. Starck declined to comment.
Lewis defended the powder suppliers by saying that long-term supply agreements minimize the risk for both companies to invest in additional capacity.
But Zogbi questioned the powder supplier's motives. "In the long run, it raises whether this situation will turn around and bite the company in its rear end," he said.