As the old saying goes, there are two sides to every story. Nowhere is that old saying truer than in tantalum supply and pricing discussions. The following article written by Dr. Daniel Persico of KEMET Electronics provides a corollary perspective to allow you to make your own judgments and develop supply chain strategies relative to your company’s tantalum capacitor requirements.
The Truth About Tantalum…Ore Supply, That Is
Daniel F. Persico, Ph.D.
Strategic Marketing & Business Development
There seems to be a lot of rhetoric and concern floating around in the marketplace regarding the near and mid-term availability of tantalum raw materials. This has all been couched in the context of increased materials demand, which will result from a much anticipated economic rebound in combination with the leaning-out of inventories in the channel. While these last two points will certainly be welcome and are expected in part due to the rebalancing we see after an electronics industry rebound, it appears that some of the conclusions regarding a subsequent lack of raw material availability have been made in a partial vacuum. By this, I mean that some of the recent activity in the supply chain has either not been considered, has been dismissed as inconsequential, or is not completely understood in the context of the expected impact it will have on the market, and of particular interest on the tantalum capacitor market moving forward. The result is a market at the crossroads of determining whether it should return to the anxieties of rebound procurement mania, or conversely, take a more calm and concerted approach which would include reviewing historical trends, analyzing a greater base of facts, and recapping expectations for near and mid-term global economics. If the last three points are taken into consideration they would lead to one conclusion, that being that there is sufficient ore to meet future needs of the market.
Let's first take a look at history. If we examine the last six semiconductor cycles (passives follow semiconductors), there is an initial “phase one” snap-back which lasts approximately 12 months from baseline to peak and back to baseline, followed by a longer phase two which is a more steady and manageable upward trend in demand. The reason for this two-phase response is that the channel always over-corrects on the way down and during the snap-back. This is followed by more rational inventory management that more closely represents the true level of demand in the marketplace and is more consistent with the desired level of channel turnover.
So, what does all this have to do with raw material availability in the supply chain? Well, it's all connected. Historically, we would see raw material capacity taken offline in order to balance supply and demand, and this time it was no different; however, during this downturn there was other activity in the supply chain that mitigated the reduction in “active” capacity.
Some of this activity was directed at leaning out the supply chain in order to align it better with and make it more responsive to end-market demand by eliminating many of the non-value-added steps present today. Other activity was focused on adding raw material capacity back into the supply chain.
The benefits of the actions taken by KEMET to vertically integrate their supply chain are multifold. Certainly, the opportunity to support bringing the Democratic Republic of Congo (DRC) back online, put conflict-free tantalum from this region back into the supply chain, and place socially sustainable programs on the ground, created opportunities and benefits that cannot be dismissed. In addition, it eliminated speculation in the supply chain by reducing the number of hands that touch the tantalum ore prior to it reaching the smelters, and ore capacity was isolated specifically for the purpose of manufacturing tantalum capacitors from conflict free material. If a portion of the global tantalum ore supply is targeted for the manufacture of capacitors only, and in doing so the speculation related to this material is eliminated (speculation which by the way adds no value to the miners, the capacitor manufacturers or the customers), over the long term we would expect to have an overall positive impact on the extreme price fluctuations we have seen in ore costs, fluctuations that have negatively impacted end user costs and tarnished the attractiveness of tantalum capacitors.
Something else to remember is that there are stockpiles of tantalum ore waiting to be moved into the supply chain when the SEC finally issues the Conflict Minerals provision of Dodd-Frank. The owners of these stockpiles are expecting that this law, as it relates to the use of existing stockpiles, will be forward looking and allow these stockpiles to be moved into the supply chain.
In addition, there have been some concerns raised that the closing of the GAM Wodgina mine will create a void that will not be filled otherwise. However, there are other adequate sources of tantalum ore, and lest we forget, this mine was not running at capacity when taken off line. In addition, GAM has two other sources for tantalum ore somewhat mitigating any impact as a result of closing Wodgina.
So, when all is done, we should expect to see a manageable increase in overall demand once the channels come into balance with the true demand, coupled with the anticipation of a pick-up in global demand. Additionally, there are two capacitor manufacturers supporting an increase in conflict-free ore from the DRC. There are stockpiles of ore waiting for Provision 1502 of Dodd-Frank to be issued which will be unleashed on the market at that time. And, there are alternate global sources of tantalum ore that are sufficiently large enough to help fill any potential shortfall.
It seems that the only parties who benefit from the discussion of a shortfall would be the speculators and miners. And, while this is a possibility, and capacitors are only one application requiring tantalum, I expect that the non-capacitor applications, which are less price-sensitive based on lower overall tantalum content, would see this increase because these industries have not been proactive in ensuring that there is material effectively feeding their supply chains.
One more thing – if raw material availability does look like it will become tight, we can be certain that any capacity taken offline will find its way back into the market. And, the time it takes to use the available inventories will most likely be suitable to allow this capacity back into the supply chain in a timely manner.