Message 17211582
Semiconductors
The Semiconductor Beat
March 18, 2002 SUMMARY
* Industry data continues to support our thesis that
Jonathan Joseph rising utilization rates will begin to spur new capital
spending. Last week, the Federal Reserve reported
utilization rose marginally 30bps to 62.6% in Feb., after
Ramesh Misra hitting a low of 59.4% in August, and recent SICAS data
rose from 64% in Q3'01 to 66% in Q4'01.
* Processor prices weakened slightly last week, with the
Dunham Winoto discount/list on both P4s and all processors to 14% and
16%, respectively. AMD processor prices slipped 4%, as
the company cut list prices on launch of the new Athlon
XP 2100. Seasonally, processors are heading into their
weakest period.
* Spot prices for 128Mbs fell to $3.80 (-7%), but came
off the week's lows of about $3.75. 256Mbs declined to
$7.87 (-5%), while 128Mb DDR fell to $4.09. (-1%). Buyers
gradually re-emerged late Friday.
* Flash prices were firm once more: 64Mbs at $11.50 and
32Mbs at $8.31. Low-end parts were also flat at $1.30 for
4Mbs and $0.90 for 1Mb
OPINION: CAPITAL SPENDING RISES AS UTILIZATION RATES EDGE UP
"It appears to us that general consensus is still overcome by the idea that
no new "killer application" is immediately visible, and that until one
appears, growth will likely remain elusive. Fortunately, our (nearly 18-year)
history with post-slowdown sentiment suggests to us this view may prove to be
an oversimplification...Despite claims to the contrary, the impending "killer
applications" in the personal computer and networked computing periods were
not known or understood until well after the fact."
-Technology hedge fund newsletter, February 2002
Given the weakened cash flow at most suppliers in the semiconductor segment,
manufacturers are not likely to raise capital spending until they begin to
see their own earnings prospects improve. Utilization rates are a clear
indication that demand is picking up and that unprofitable capacity taken off
line is beginning to have a positive effect on the bottom line. A few weeks
ago, SICAS (Semiconductor International Capacity and Statistics), an SIA
affiliate, reported that global fab utilization in Q4 improved to 66.1% from
64% in Q3. Also last week, the Federal Reserve reported that utilization in
the "Semiconductor and Related Electronic Components" sector ticked up in
February to 62.6% from 62.3% in January (which was revised upwards from 60.3%
previously). This news, of course, was not new to us. A score of
semiconductor companies have recently reported rising utilization rates. Just
last week, UMC (UMC-$9, 1M) suggested that utilization in Q2'02 could come in
at above 70%, up from the 55-60% range expected for Q1, and well above the
36% low reported in Q3'01. SSB Taiwan semiconductor analyst Andrew Lu also
expects TSMC (TSM-$19, 1M) to post overall utilization rates in the 60-65%
range for Q2. Along with the higher utilization, the trends in wafer pricing
are also headed up. According to press reports in Taiwan, both TSMC and UMC
are likely to raise wafer prices by 10-20% in Q2. This, of course, is having
positive implications for capital spending.
FIGURE 1. FAB UTILIZATION AND CAPACITY
Source: Salomon Smith Barney, Federal Reserve Board and SICAS
In the capital equipment sector, we have for some time said that capital
spending in 2002 would be down, but that "the tick" would be up. SSB
equipment analyst Glen Yeung earlier forecast most semiconductor companies
would reduce spending by 30-35% this year, but plans would likely be revised
upward through the year, ending at a decline of 15%, or so, by year-end.
Contributing to the upward revisions: 1) High utilization rates for leading-
edge capacity resulting from strong customer demand, 2) The need to upgrade
existing fabs to accommodate new technologies such as 300mm wafers and line-
width shrinks, 3) New foundries going into China. Indeed, when we visited UMC
in Taiwan a week ago, they were accelerating their capital spending plans by
as much as $200 million on an $800 million base. At an investor conference
last week, Taiwan Semi indicated that its capex would not be "significantly
less" than last year, after guiding capex down by 25% only a couple months
ago. There have also been reports that some orders from Samsung (5930KS-
W330,000, 2H), especially for 300mm equipment, have been pulled in. This
should all be good for the capital equipment sector.
NEW PRODUCT INTROS AT CEBIT; PRICING SOFTENS SLIGHTLY
At the CeBIT trade show in Germany, AMD (AMD-$15, 1S) launched its latest
Athlon XP 2100 processor, along with a higher speed grade of its mobile
Athlon 4 processor. The company also announced that it expects to begin
shipping its "Thoroughbred" processors, built on the 0.13- micron process, by
the end of the month. All of AMD's current processors are built on the 0.18-
micron process. The obvious success in AMD's ramp of its 0.13-micron process
is key in allowing them to move the Athlon, which has a maturing core as it
is now designed, up another speed grade. By the end of 2002, AMD expects all
of its processor output from its Dresden fab to be on the 0.13-micron
process. For its part, Intel (INTC-$32, 1M) launched the P4 mobile earlier
this month, and is likely to launch the 2.4GHz P4 desktop in April.
Processor prices weakened slightly last week, as the discount to list on
Intel processors widened from 15% to 16%. The discount/list price on P4s also
widened by a point to 14%. Spot market pricing and marginal processor demand
should remain sluggish going into Q2 for a couple of reasons: 1) Intel's
backlog is now adjusting to the P4 coming off allocation in recent months;
these cancellations were anticipated, and incorporated into Intel's
conservative Q1 guidance, 2) Seasonally, Q2 is the weakest time of the year,
with shipments on average down about 3% over the last five years for Intel.
3) There is still little evidence that a major upturn in U.S. corporate info
technology (IT) capital spending is imminent, though we are expecting some
contribution in 2H'02. Along with its launch of the Athlon XP2100, AMD
adjusted prices on some of its older processors---a price move that was
rapidly reflected in the spot markets. As a result AMD processor prices
slipped 4% over the week.
DRAM DOWN ON THE WEEK BUT OFF WEEK'S LOWS
DRAM trading last week was pretty turbulent, with prices for all densities
declining after having risen consecutively for at least seven weeks. By the
end of the week, spot prices for benchmark 128Mbs fell from $4.09 to $3.80 (-
7%), though they bounced off the week's lows of $3.75 in some markets.
Meanwhile, 256Mbs declined from $8.28 to $7.87 (-5%), while 128Mb DDR
declined to $4.09 (-1%). We heard unconfirmed reports that some
manufacturers, particularly Samsung, are still looking to raise contract
prices again by about $0.35 to $5.50 or so (raising OEM 128Mb modules by
about $3, from $42-44 to $45-47). Most producers, however, appear to be
holding back to see what spot market prices do before trying to raise prices
further. We believe further near-term contract price increases are unlikely,
for several reasons: 1) New capacity will be coming back on line in Q2 as
Micron (MU-$33, 1S) increases wafer starts and Hynix (660.KS-W1695, 2S)
restarts its Eugene, Oregon fab; 2) Personal computer demand normally
slackens in Q2, which is the weakest quarter of the year; 3) Prices have
risen such that 256Mbytes of DRAM, at about $100, now slightly exceeds 10% of
the BOM (bill of materials) for a PC, which currently has an average price
slightly exceeding $1,000. Reports we got out of CeBIT in Germany suggested
demand in Europe around the show was slow, with prices in that region
slightly lower than elsewhere, though they firmed by the end of the week.
Brokers we spoke to are expecting prices to be somewhat turbulent in coming
weeks.
One more twist in the ever-confusing events surrounding the possibility of a
Micron acquisition of Hynix's DRAM operation. On Sunday, Bloomberg News
quoted a Korean bank source as saying that Hynix Semiconductor and Micron
Technology have signed a preliminary agreement to sell Hynix's DRAM fabs to
the Boise, Idaho-based company for about $4 billion. Though details at this
time are still sketchy, press reports suggest a price tag for about 7 DRAM
fabs of about $4 billion, which includes a mixture of equity, cash and debt
assumption. In addition, the banks want Micron to take some of the ownership
of the 6 remaining fabs, while Micron wants additional loans from the banks
for upgrading the Hynix DRAM fabs, according to the press reports.
FLASH PRICES STABLE
Flash had a pretty solid week as prices remained flat for the second week in
a row: high-end 64Mbs stayed firm at $11.50, 32Mbs at $8.31, 16Mbs at $5.00,
and 8Mbs at $2.83. Low-end parts were also flat at $1.30 for 4Mbs and $0.90
for 1Mbs. The feedback from the flash suppliers is still mixed: ST Micro#
(STM-$33, 1H) sees weakness, while Silicon Storage Tech# (SSTI-$11, 3S) is
seeing a little more firmness. Intel is becoming more positive, as is
Advanced Micro. Brokers are seeing firming in AMD and Intel parts. Intel, in
particular, is plugged into the cellular handset market, which absorbs about
60% of all product produced. On its mid-quarter update last Tuesday (3/12)
Nokia (NOK-$22, 3M) told analysts that it believes excess global inventories
of handsets at the end of Q4 '01 have been worked down while at the same time
reiterating its industry shipment forecast of 420-440 million units for 2002.
Siemens (SI-$67, 2M), on the other hand, is somewhat more conservative and
last week revised its unit shipment outlook down from 420-450 million to 400
million (flat yoy). |
