What a difference a year makes. Early in 2001, tantalum buyers and suppliers tried to come up with solutions to a supply shortage that triggered panic buying and rapidly escalating market prices for ore and mill products. Early in 2002, with weak demand and depressed spot prices for tantalum ore, end-users are complaining that they are being gouged by high prices in long-term take-or-pay contracts signed late in 2000 and early in 2001. Processors, however, haven't yet lowered prices for mill products because of long-term take-or-pay contracts they signed for ore.

Tantalum's major application (65%) is widely used in the electronics industry for the manufacture of capacitors—devices that regulate the flow of electricity within an integrated circuit—and other components. Because it is hard and a good conductor of heat and electricity, the rare blue-gray metal is also used to make corrosion-resistant parts for chemical processing equipment; high-temperature parts for vacuum furnaces, aircraft, and missiles; alloyed with other metals to make carbide cutting tools, and fabricated into dental and surgical instruments and medical prostheses.

Surging world demand for electronic equipment requiring tantalum capacitors tightened supply of tantalite ore in 2000, and prices skyrocketed. Tantalite ore reached a historically high price of $365/lb by fourth quarter 2000. Global purchasing of tantalum (the metal processed from tantalite) surged dramatically in 2000 to 5 million lb, a 38% increase. Supply couldn't keep pace, leading to a supply deficit of 500,000 lb. Prices for tantalum ore, an intermediate product, rose and the market price of processed tantalum powders soared as high as $240/lb by year 2000 end as demand boomed for electronic capacitors used in mobile phones, video cameras, video-game devices and laptop computers.

Electronics producers feared capacitor shortages so much that they double and triple-ordered tantalum capacitors, according to C. Edward Mosheim, technical officer for the Tantalum-Niobium International Study Center in Brussels, Belgium. "That scenario created a false demand surge for tantalum," he says.

"The problem was that when things were strong, people tended to think they would continue to be strong," says Lee Sallade, sales manager for electronic and optics products at supplier H.C. Starck Inc. in Newton, Mass.

Supply concerns ran so rampant a year ago that Kemet Electronics Corp. of Greenville, N.C., the world's largest manufacturer of tantalum capacitors, stockpiled at least a year's worth of tantalum powder. Atop that, Kemet Electronics spent $5.5 million to gain half ownership of Australasian Gold Mines Ltd.'s Mount Dean tantalite mining operation in western Australia.

Another capacitor maker, Vishay Intertechnology Inc. of Malvern, Pa., also stockpiled tantalum-bearing ore in 2000 and early 2001. And Vishay entered into long-term take-or-pay contracts with its top supplier to purchase specified quantities of tantalum worth $47 million in 2001 and averaging $37.5 million in 2002-2005. In addition, Vishay made purchases of tantalum from other suppliers under annual contracts at prices subject to periodic adjustments.

However, Vishay experienced a significant decrease in capacitor sales last year, at the same time that prices for tantalum ore were dropping. As a result, Vishay recorded write downs of $37 million in the nine months ending Sept. 30, 2001. And, according to the latest available quarterly filing with the Security and Exchange Commission (SEC), "depending on the extent of the downward pricing trend for tantalum ore," Vishay "again could be required to write down the carrying cost of its inventory of tantalum ore" in the future.

Extremely weak demand for electronic products since second quarter 2001 has resulted in inventory glutting the tantalum capacitor market. PURCHASING's monthly pricing survey of electronic components shows capacitor market prices dropping 24% in less than a year. Demand for tantalum ore has collapsed and spot prices dropped back 86% to $50/lb by the end of 2001. In recent weeks, it has been even cheaper—bottoming out in the $30-40/lb range.

Although the tantalum capacitor market has weakened significantly, new supply contracts inked early in 2001 brought the annual average contract price of tantalum powder to a record $330/lb, as compared with $140/lb five years earlier. Tantalum powder prices are only recently sliding off a monthly peak of $360/lb recorded early in 2001. Tantalum processors also signed long-term take-or-pay contracts a year ago with ore miners in Australia, Brazil, Canada and the Congo. Bayer Group of Germany tells the SEC "strong competitive pressure has seriously depressed prices and has forced (subsidiary H.C. Starck Inc. in Newton, Mass.) to make substantial write downs of tantalum inventories."

The Tantalum-Niobium International Study Center hasn't yet determined the extent of the decline in tantalum demand last year, but commodity analysts at the U.S. Geological Survey suggest domestic use collapsed 35% last year to 937,000 lb from 1.3 million lb in 2000. Lee Sallade, manager of sales for electronic and optics products at supplier H.C. Starck, estimates that purchasing by the domestic electronics sector alone fell 50%.

"Demand for raw materials such as tantalum products including powder and wire has weakened considerably," says Thomas H. Odle, vice president and general manager of supplier Cabot Performance Materials Corp. in Boyertown, Pa. He says "a significant amount of inventory remains in the tantalum supply chain because the purchasing downturn has been so severe." Looking at 2002, he adds, "weak demand and high levels of inventory means that the market price for tantalum products will remain weak." Sallade says he "cannot predict when tantalum powder sales may recover," but suggests "the electronics products marketplace and the corresponding demand for tantalum capacitors is likely to remain weak until the overall global electronics market begins to recover."

Mike Morton, senior vice president of global product marketing for capacitor distributor TTI Inc. in Fort Worth, Texas, says "significant inventories exist throughout the supply chain and it is hard to get those inventories down when consumption is so weak." He projects "it will probably be the second half of this year before (distributors) see an increase in demand" strong enough to trigger renewed buying from capacitor producers.

Falling price tags and excess raw materials have reduced tantalum capacitor profit margins. Recent comments by some capacitor sales executives suggest tantalum capacitor list prices are about to rise, forcing customers to absorb higher tantalum costs. Most market analysts dismiss these comments as saber rattling in an attempt to get powder makers to renegotiate the long-term contracts. With a demand surge, analyst Shawn Wood at iSuppli Corp. in El Segundo, Calif., sees no immediate increase in tantalum capacitor prices. Neither does David Maguire, CEO of Kemet Electronics, who expects capacitor prices to keep falling until midyear. He projects rising end-market demand "will boost capacitor shipments in the second half and reduce material inventories, perhaps alleviating margin pressures."

Still, some other major capacitor makers are publicly complaining that tantalum powder suppliers are denying requests to renegotiate multiyear "take-or-pay" contracts signed at the height of the last shortage. Glyndwr Smith, senior vice president at Vishay Intertechnology Inc. in Malvern, Pa., complains: "We have found so far that negotiation with the powder suppliers has not been very effective." John Gilbertson, president and chief operating officer of capacitor maker AVX Corp. of Myrtle Beach, S.C., adds that "since contract prices are subject to periodic adjustment, there's a lot of pressure to address tantalum supply contracts."

The top three-tantalum suppliers—Cabot Performance Materials, H.C. Starck and Ningxia Non-Ferrous Metals Smelter in Shizuishan City, China—won't talk about supply contract issues. "We promised our customers we won't discuss confidential contracts," Odle at Cabot Performance Materials tells Purchasing. "But the truth is that we're not the bad guys." In its latest quarterly, SEC, parent company Cabot Corp. of Boston, says its Performance Materials Group "continues to work with its customers to look for ways to help them in these difficult market conditions while preserving the long-term value of the contracts." David Lewis, senior marketing analyst for Cabot Performance Materials, admits to uncertainty about sales volume in 2002, but insists "the outlook for tantalum demand continues to be bright over the long term."

However, even Odle, Lewis' boss, suggests that new-technology developments may cut into future tantalum sales for capacitors in favor of niobium. Several capacitor suppliers in the U.S., Japan and Germany are ramping up production of niobium capacitors. Niobium capacitor technology has been in development for several years. The metal (also known as columbium) is now used mostly to alloy steel and superalloys, is far more abundant and costs at least 10 times less than tantalum. Lower in density than tantalum, niobium reduces the weight of the components in which it is used. "This should translate into lower production costs for niobium capacitors," says Chris Reynolds, applications manager at AVX.