Since the third quarter of 2022, the electronics supply chain has been striving to rebalance inventories that swelled considerably as PC, smartphone, and consumer electronics end-market demand plummeted and sales in other segments softened.
Inventory reductions and corrections initially thought to be largely done in Q2 are now projected to be complete in Q3. Unlike previous cyclical downturns, heightened macroeconomic uncertainty is lingering, and industries have cut factory utilization more swiftly and sharply as they adjusted to weakened demand.
Stability on The Horizon?
Distributor, supplier, and contract manufacturing inventories have mostly crested. OEM inventories are less so, with indications some automakers may be building electronic component safety stocks. In Q2, lead times and prices will further drop toward historical norms across most commodities. Book-to-bill ratios for certain end markets will continue trending positively – with consumer markets remaining lethargic while automotive and industrial segments remain relatively robust.
Excluding memory in H2, just 4% of all semiconductor lead time dimensions will expand, while 35% will decline. At-volume passive components under 12-week lead times for Q2 more than doubled, and the number of quoted lead times beyond 52 weeks was halved. Additional flexibility exists in price and availability across many commodities and sub-commodities, including resins and metals.
Across all electronic components in H2, just 1% of pricing dimensions are forecast to increase, and over half will be stable. Almost 40% of passive component prices are projected to be stable in H2, and for semiconductors excluding memory, 65% of the pricing dimensions will remain unchanged. Electronic component lead times have retreated, despite capacity reduction strategies. Elevated prices persist for specific sub-commodities.
Potential Constraints For Active and Passive Devices
If demand rebounds quickly, particularly in China and for smartphones or data centers globally, supplies of certain active and passive devices will again become constrained. Looking at the critical ASIC/MCU/MPU segment, PC shipments are set to decline by as much as 10% in 2023, while the outlook for data center servers is cloudy and appears uncertain.
Amid this poor demand environment, pricing will remain stable in 2023, and lead times will decline steadily. The memory business faces the same weak end-market market conditions, with DRAM revenue set to plunge by more than 40% in the first half of 2023 compared to the same period in 2022. Memory pricing conditions shifted decisively in favor of buyers from May 2022, and global DRAM average selling prices will erode by as much as 15% into Q3.
And yet, spot prices for DDR4 are stabilizing, and eMMC spot pricing has increased. A notable exception to demand frailty, analog IC pricing is one and a half times higher than the Commodity IQ Price Index. Converters, vital to EV powertrains, were a key analog commodity that experienced year-on-year demand growth in February and an 8.2% quarter-over-quarter rise in Q1, with converter pricing standing over three times the Commodity IQ Price Index.
Material Commodities and Operations are Stabilizing
Improved supply and favorable resin pricing are forecast for Q2 and Q3, with procurement leaders laser-focused on cost reductions and avoidance. Chinese raw metal prices are stabilizing, though Japanese suppliers are pushing for increases due to rising energy costs. Lithium and cobalt spot pricing is desperately searching for a bottom – Chinese lithium hydroxide prices collapsed 38.0% from January 1 to March 31, and are down from the November 2022 peak by 46.3%.
Battery-grade lithium carbonate pricing from South America fell 28% from mid-September 2022 to mid-April. Cobalt prices from China declined by 22.5% from January 1st to late April. Muted domestic EV demand, excess capacity, high refiner inventories, and battery maker hesitance to restock signal continued price declines for Chinese battery metals. Demand in the logistics segment is down broadly, with air, ocean, and road freight all experiencing slowing volumes in early 2023.
Air cargo rate equilibrium by late Q2 is afoot, with the number of six-month contracts reaching nearly 40% through Q1. And, despite macroeconomic volatility driving ocean and truck freight rates down, last-mile rates have remained persistently elevated.
Can We Expect a Rebound?
Economic conditions are at a tipping point, with debates ongoing regarding the timing, severity, and certainty of a recession in 2023. Interest rate increases across the globe and the spreading banking crisis could send the U.S. and other economies into sharp downturns.
Conversely, with solid job numbers globally, U.S. Census Bureau reports new orders for non-defense durable goods outgrew previous estimates. U.S. electronics new orders surged year-over-year through March by 8.4%. Economies may achieve a soft landing – or avoid a downturn entirely.
Macroeconomic shifts will have massive repercussions for the global electronics supply chain, with a demand rebound for PCs, smartphones, and data centers required to drive new growth. The Supplyframe forecast for a markedly more balanced electronics supply chain in H2 persists as component inventories are largely digested into Q3.
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