Corning – The Pigs are Flying & the Blue Moon is Rising
Corning (GLW) has indicated that it has raised prices ‘moderately’ for display glass substrates in the 2nd quarter. According to the statement, “This price adjustment is a result of increased costs in logistics, energy, raw materials, and other operational expenses during the current glass shortage. Additionally the cost of precious metals required for maintaining reliable glass substrate manufacturing have risen significantly since 2020. While Corning has sought to offset these added costs with productivity enhancements, it can no longer fully absorb them.”
We took a quick look at raw material prices used to make glass substrates, and while borosilicate glass is primarily silica which is highly refined or grown, other ingredients, most of which are closely guarded secrets, include Boron Oxide (made from Borax) and oxides of Sodium, Potassium, and Aluminum. The price of Boron Oxide has risen by 9.5% over the last 12 months, enough to make a difference given it constitutes between 7% and 13% of borosilicate glass composition, so there is justification for a price adjustment, even at this basic level, and as we have noted, the price of rare earth materials has risen precipitously over the last year, also having an impact on the overall cost of display glass production, despite the small quantities used.
But when considering that glass production is one of the most energy intensive production processes, a quick look at the spot price of natural gas during the same period is an even bigger indicator that the cost of production is rising. As seen in Fig. 2, the spot price of natural gas has risen 32.6% in what is the last 13 months, and if we go back just one month (Feb.), that increase would have been 67.4%. With energy accounting for between 14% and 15% of the glass industry’s production costs, just the increased cost of energy would justify higher prices.
So if a glass substrate price increase is justified from a raw material and energy standpoint, are there any other issues that come into play here that makes this time different from others? Before we answer that question, it is important to understand a bit of history concerning glass price declines. If we go back to the ‘old days’, especially when panel prices were falling quickly, we note glass ASP declines at Corning of over 6% on a quarterly basis between 4Q and 1Q (2015), however in subsequent years that same 4Q/1Q decline began to moderate with company comments like “sequential price declines in 1Q were the best in 5 years” (2016), “sequential price declines were moderate – the best in 6 years” (2017), “…best in a decade…” (2018), “more moderate than expected” (2019), and continued in that vein, with estimates falling to low single digits and hints of ‘flat’ pricing late last year.
As demand increased last year we expect q/q glass contract price adjustments got close to zero, and while the company does not reveal the actual contractual price reductions, we expect that large customers (top 4 represented ~74% of sales in 2020) were willing to hold glass prices steady to insure continued supply. Then the ‘other issues’ came into play, a power outage at Corning competitor NEG’s (5214.JP) plant in Shizuoka, Japan, which shut down the plant for over 5 hours and an explosion at Ashai’s (5201.JP) Gumi glass plant (Gen 10.5.). Given that glass production is a continuous process and that the rapid cooling of a plant’s furnaces can damage the refractory brick that lines the furnace, just the NEG shutdown is expected to reduce industry glass production by 2% to 3%. While this seems to be a relatively small amount, when the industry is as tight as it is currently such a reduction in capacity can make a significant difference. In order for panel producers to make sure they have enough glass substrate capacity to meet current demand, they will be willing to pay a higher price for production, especially those who are directly affected (We believe LG Display (LPL) is a key NEG customer),, which pushes up the overall price of glass. This coupled with the increased cost of production makes Corning’s price increase, which we expect could be as much as 3% to 4%, a no-brainer, and panel producers will likely be happy to pay it despite its ‘unprecedentedness’, hence the flying pig and blue moon.
We took a quick look at raw material prices used to make glass substrates, and while borosilicate glass is primarily silica which is highly refined or grown, other ingredients, most of which are closely guarded secrets, include Boron Oxide (made from Borax) and oxides of Sodium, Potassium, and Aluminum. The price of Boron Oxide has risen by 9.5% over the last 12 months, enough to make a difference given it constitutes between 7% and 13% of borosilicate glass composition, so there is justification for a price adjustment, even at this basic level, and as we have noted, the price of rare earth materials has risen precipitously over the last year, also having an impact on the overall cost of display glass production, despite the small quantities used.
But when considering that glass production is one of the most energy intensive production processes, a quick look at the spot price of natural gas during the same period is an even bigger indicator that the cost of production is rising. As seen in Fig. 2, the spot price of natural gas has risen 32.6% in what is the last 13 months, and if we go back just one month (Feb.), that increase would have been 67.4%. With energy accounting for between 14% and 15% of the glass industry’s production costs, just the increased cost of energy would justify higher prices.
So if a glass substrate price increase is justified from a raw material and energy standpoint, are there any other issues that come into play here that makes this time different from others? Before we answer that question, it is important to understand a bit of history concerning glass price declines. If we go back to the ‘old days’, especially when panel prices were falling quickly, we note glass ASP declines at Corning of over 6% on a quarterly basis between 4Q and 1Q (2015), however in subsequent years that same 4Q/1Q decline began to moderate with company comments like “sequential price declines in 1Q were the best in 5 years” (2016), “sequential price declines were moderate – the best in 6 years” (2017), “…best in a decade…” (2018), “more moderate than expected” (2019), and continued in that vein, with estimates falling to low single digits and hints of ‘flat’ pricing late last year.
As demand increased last year we expect q/q glass contract price adjustments got close to zero, and while the company does not reveal the actual contractual price reductions, we expect that large customers (top 4 represented ~74% of sales in 2020) were willing to hold glass prices steady to insure continued supply. Then the ‘other issues’ came into play, a power outage at Corning competitor NEG’s (5214.JP) plant in Shizuoka, Japan, which shut down the plant for over 5 hours and an explosion at Ashai’s (5201.JP) Gumi glass plant (Gen 10.5.). Given that glass production is a continuous process and that the rapid cooling of a plant’s furnaces can damage the refractory brick that lines the furnace, just the NEG shutdown is expected to reduce industry glass production by 2% to 3%. While this seems to be a relatively small amount, when the industry is as tight as it is currently such a reduction in capacity can make a significant difference. In order for panel producers to make sure they have enough glass substrate capacity to meet current demand, they will be willing to pay a higher price for production, especially those who are directly affected (We believe LG Display (LPL) is a key NEG customer),, which pushes up the overall price of glass. This coupled with the increased cost of production makes Corning’s price increase, which we expect could be as much as 3% to 4%, a no-brainer, and panel producers will likely be happy to pay it despite its ‘unprecedentedness’, hence the flying pig and blue moon.
Boron Oxide - Raw Material Price - Source: CEIC.com
Natural Gas Spot Price - Source: Various
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