AI server boom fuels record supply crunch for the ‘rice of electronics’

The global supply of multilayer ceramic capacitors (MLCCs), components crucial for electronics and often referred to as "the rice of the electronics industry," has plummeted to an all-time low due to skyrocketing demand from artificial intelligence infrastructure. A report from UBS Evidence Lab revealed that worldwide distributor inventory levels for these components dropped by 8% in August 9 compared to the previous four weeks. This downward trend has been ongoing, according to the report.

MLCCs, which function as electrical buffers in circuit boards and are experiencing widespread usage in high-performance servers, have become a darling investment among AI-driven investors, following memory chips and optical modules. The total value of distributor inventory surged 10% over the same period, according to UBS.

Year-on-year data from July showed a 13% increase in the unit price index, inventory volumes declining by 22%, and inventory value up by 6%. UBS analysts believe that supply-demand tightness could initially affect AI-related and distributor channels before extending to the overall market.

Major manufacturers, including Japan's Murata Manufacturing and South Korea's Samsung Electro-Mechanics (SEMCO), have witnessed similar inventory declines, with Murata's volume dropping by 8% and SEMCO's by 20% as of August 9. Despite expanding manufacturing capacity, output has not been able to keep pace with the escalating demand as the sector enters what Goldman Sachs calls the "largest and longest" cycle in its history, driven by the immense computational needs of modern data centers.

Citrini Research projects that demand for AI server-grade MLCCs is set to grow by approximately 80% annually. Wall Street asset managers are hastily trying to capitalize on the new hardware bottlenecks in the broader AI supply chain. Defiance ETFs, a US-listed exchange-traded fund, launched on Wednesday, specifically targeting MLCCs and passive electronic components powering AI infrastructure.

Sylvia Jablonski, the chief investment officer of Defiance ETFs, highlighted that capacitors, often overlooked, are the least appreciated layer of the AI buildout and believe the companies providing this layer are at a structural demand inflection.