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Will consumers, besieged by higher gas prices, continue to buy electronics?

Rising prices for materials, energy and transportation are driving up the cost of manufacturing. Metal prices have increased dramatically in the past year, and the prices for epoxy resins, die attach materials, substrates and even die attach materials have risen. Some hikes are due to shortages resulting from increased demand. Others are driven by demand for metals including tin, gold, copper and platinum. The industry is being assailed on all fronts by higher materials production costs due to rising energy prices.

Two years ago, the world watched as the per-barrel price of oil climbed 47% year-over-year. On May 3, 2004, the International Energy Agency warned that wealthy nations were vulnerable to higher oil prices - warnings many ignored. In my July 2004 column, I reminded readers that the impacts of higher oil prices are not felt immediately, but often take as long as eight quarters to work their way through the economy. Today, as a barrel of oil hits $72, everyone feels the impact from higher prices for gasoline, jet fuel and energy for the production of manufactured goods. Actual prices fluctuated wildly in 2005 from $7.26 to $14.08. Some companies have even started to switch to coal. The impact can be felt as the price to produce almost every good rises. These goods include resins and almost every material for electronics, semiconductors, components, boards and final product assembly.

Metal prices have also risen dramatically, based on increased demand and some speculation. Copper has risen more than 70% this year and is near its inflation-adjusted high set in the mid 1960s. The three-month copper price hit a high of $7,780 a ton on the London Metal Exchange in early May. The three-month LME aluminum price hit an 18-year high of $2,941 a ton and zinc touched a peak at $3,942.50 a ton. Gold hit a 25-year high of $684.10 per troy ounce with speculation of $700 as the next target. Prices would remain high until there is an increase in global metal inventories.¹ Silver prices (Figure 1) hit record levels of around $12 per ounce (July futures).

How does this impact the electronics industry? The price of copper leadframes has increased, the price of gold wire has increased, the price of silver-filled die attach has increased, and substrates using copper, gold and a variety of epoxy-based resins have risen. The good news, says Heraeus chief executive Helmut Eschwey, is that the rally will end, with silver the first to fall and even gold not lasting at this level.² These words bring some comfort because the 150-year-old German-owned company is the world's largest trader of precious metals. Some of the largest Japanese leadframe companies also believe that copper prices will begin to level over the next few months.

Higher energy prices have already taken a toll on many manufacturers and rising prices spell broader inflation. It is hard to imagine that the higher per barrel price for oil would not have a long-term detrimental impact on the economy. The higher prices are driven solely by demand in developed countries such as the U.S. and developing countries such as India and China. The situation could become grave should a serious supply disruption occur.

Companies that assemble ICs will be faced with higher prices for materials including epoxy mold compounds, die attach materials, laminate substrates, leadframes and wires for wire bonding. Companies that use assembly services cannot expect lower prices traditionally seen in the industry year-over-year as packages mature, but instead will continue to experience higher costs. Average selling prices for many semiconductors may actually rise (depending on pricing pressure from end-users) and if these prices do not rise, companies will suffer lower margins. The wild card is the consumer. Faced with higher prices for gas and basic commodities, will they continue to purchase the products that are driving growth in the electronics industry? Only time will tell.

References

1. Financial Times, May 6-7, 2006, pg. 11.

2. Financial Times, May 11, 2006, pg. 2.

E. Jan Vardaman is president of TechSearch International, Austin, TX; jan@TechSearchInc.com. Her column appears semimonthly.