Demand for semiconductors in the first half of the year has been stronger than expected, but the price outlook for chips remains unchanged for the rest of this year.

Overall, the average price of a semiconductor will fall by about 1% in 2008, according to researcher IC Insights. However, in 2007 the average price dropped by about 5%. The difference is due to the fact that semiconductor suppliers are scaling back on capital expenditures and foundries are running at nearly 100% utilization. Eventually, that cutback in capacity expansion could crimp supply and lead to higher prices.

Over the next three years, the pricing picture, especially for semiconductors, gets interesting. Semiconductor prices will be flat in 2009, but then increase 1% in 2010, 2% in 2011 and 3% in 2012, according to Bill McClean, president of IC Insights in Scottsdale, Ariz.

"Some of the biggest increases we will see are in DRAMs because prices were so low and suppliers have really cut back their capital spending," says McClean. He says DRAM pricing jumped 10% in May as 300mm fabs making DRAMs were at 96% utilization.

Prices for microprocessors, analog and special-purpose logic will also increase 1–3% this year because of tight capacity. While reduced capital expenditures and high fab capacity utilization rates are impacting chip prices, higher material costs are affecting prices for connectors and passive components, including resistors and capacitors.

The price of passives and connectors will be flat to down slightly for the rest of 2008. With some products, suppliers are trying to pass some of those higher materials costs on to buyers in the form of higher prices. In other cases, suppliers are absorbing the higher materials costs and just not reducing prices, or reducing them only slightly.

The higher costs are for copper, gold, and other materials used in interconnects. As the cost for raw materials increased last year, "connector manufacturers started to increase prices to distributors and then slugged it out with large OEMs every time a new contract came up," says Ron Bishop, president of connector industry researcher Bishop and Associates, in St. Charles, Ill. "Suppliers got some concessions."

The net effect was a 1–2% increase in prices. Usually connector prices fall 2–5% per year.

It's often not easy for connector manufacturers to pass on materials cost increases to buyers. "Copper has gone up a lot," says Keith Teichmann, director of marketing and director of product management for ITT in Santa Ana, Calif. "Stain-less steel is up. Gold is up three times what is was, but it's hard to recover those costs. We can't go to market with double-digit price increases," he says.

Suppliers may find it more difficult in the second half of this year to raise prices or even keep them stable. "In the second half, connector demand will be softer and it is going to be difficult for connector makers to not compete on price a little bit more aggressively to get the order," says Bishop. "We are going to see some price erosion again."

The less specialized the product, the more likely there will be price erosion.

Buyers can expect prices for capacitors and resistors to be steady to slightly down overall. Prices would have dropped more 8-9% for the year, but—as with connectors—rising material costs will prevent any steep price declines.

Suppliers say the average price for commodity multilayer ceramic capacitors (MLCC) will be flat to down 2% in 2008, Multilayer ceramic capacitor prices usually fall by about 5% per year.

David Yeo, commodity manager for DRAM and passives for electronics manufacturing services provider Celestica in Toronto, says tin and nickel have significant impact on cost of ceramic capacitors. "The reduction in nickel pricing helps cushion the raw material challenges for ceramic capacitors manufacturers," he says.

Resistor manufacturers say the high price for ruthenium used in thick film resistors means prices will be steady. Copper and gold are also used in resistors. However, Yeo notes that the price of ruthenium, which increased last year, fell from $430/troy oz in January to $300/troy oz in June.

Buyers need to watch the price of raw materials carefully as suppliers will try to pass materials cost increases on to buyers.