FOCUS: Firmer chip prices boost interest in sector/caution remains
TOKYO (AFX-ASIA) - The recent rebound in chip prices has helped boost
investor interest in producers and equipment suppliers to the industry but
caution remains as to whether the recovery will be sustained, analysts said.
After sharp falls in recent years due to surging output, production cuts
have helped slow price declines, resulting in producers such as NEC Corp and
Samsung Electronic Corp moving to raise prices for some mass memory products,
analysts said.
However, the output cuts may prove to be only temporary, threatening the
emerging price recovery.
"Underlying supply and demand conditions in the microchip sector have
improved significantly and the market has bottomed out of the worst phase,
partly because de-stocking of PCs in the U.S. was completed in the summer,"
said HSBC Securities analyst Naoki Sato.
"DRAM prices have not fallen since August and indeed have been rising. This
is partly in reaction to the sharp falls seen and also due to improving supply
and demand conditions," Sato said.
"Additionally, the rise in DRAM chip inventories ahead of the Christmas
sales season in the U.S. has finished. I expect this steady trend (of DRAM chip
prices) to continue through this year.
"On the supply side, Japanese chip makers have aggressively cut output and
inventories," Sato said.
Wako Research Institute analyst Yukihiko Shimada said "the decline in
microchip prices has slowed due mainly to three reasons.
"One is a recovery in demand for PCs, another is the positive impact of
cuts in output by Korean makers, and the third is weakness in sales of chips by
Micron," Shimada said.
"However, I do not see the outlook for the microchip market as bullishly as
some. Microchip prices will continue to fall.
"The strength of PC demand is expected to continue as long as the U.S.
economy remains strong but output cuts by Korean makers have ended and they
will boost output again, and this expected to impact on the market from
January, February.
"Additionally, I expect Micron's chip sales to improve soon or later, even
though they are lagging at present. Once sales start to get back onto a strong
trend, this company will boost production like a rocket," Shimada said.
Salomon Smith Barney analyst Hiroshi Yoshihara said "our view of DRAM
microchip prices is that they will remain firm until Christmas.
"This is because demand for DRAM chips will be strong until Christmas, and
also because Japanese and Korean makers have cut output," Yoshihara said.
"However, demand will slow as the New Year begins. Also, Korean makers are
now producing at full capacity and their product will hit the market in the
March quarter.
"As a result, we forecast the 64M DRAM price to average 7.5 usd in 1999.
The price is expected to decline to about 8.0 usd from the present level of
around 9.0 usd from the start of the year, falling back to around 6.5 usd by
end-1999," Yoshihara said.
Despite anticipated price declines moving further into 1999, ongoing firm
PC demand should put a floor under the market, analysts said.
"It may be possible for 64M DRAM prices to rise back to around 10 usd and
as chip makers are not planning sizeable capital spending on new plants, this
will also help to slow the decline in prices," said Shimada of Wako Research
Institute.
New Japan Securities analyst Hiroshi Ohira said that while "microchip
prices will improve overall, the gap between those (companies) succeeding and
those failing will widen.
"We do not have any negative factors at present but we need to wait until
the prospects for the global economy, including the U.S. economy, are clearer.
(As yet) we are not able to assess whether microchip prices will continue to
recover and, if so, how long this is likely to continue.
"Prospects for capital spending next year by U.S. companies in the
information sector will be the key issue, as some signs are emerging that
corporate earnings in the U.S. have started slowing," Ohira said.
"If no signs of a deterioration of U.S. corporate earnings emerge, then I
expect PC demand in the U.S. will expand by 15.0 pct next year, which will
boost DRAM demand by 7.0 pct."
Against this overall economic background, another area of concern is the
possibility that South Korean manufactureres may reverse earlier production
cuts and that new technology developments will come through, analysts said.
"Samsung will boost chip production but we do not know yet the likely
impact of the LG Semiconductor merger with Hyundai Semicon," said Ohira of New
Japan Securities.
"Until details are clear of how much Korean makers will spend on capacity,
the impact of Korean output is difficult to assess."
Further out, HSBC's Sato said he expects a recovery in the chip market to
emerge clearly by late 1999, or at the latest, by early 2000.
"If PC sales go smoothly in the U.S. Christmas sales season, which means
the smooth liquidation of chip inventories built up for the Christmas sales,
the market will move smoothly to a full-fledged recovery in late 1999. If not,
it will be delayed by about six months," Sato said.
"A long-term view for a full recovery is that microchip supply will not
rise as Japanese makers continue to restrain capital spending, while demand is
expected to rise gradually," as demand for set-top box receivers for satellite
broadcasting and for receivers for digital TV broadcasting in the U. S. emerges,
Sato said.
For his part, Yoshihara of Salomon Smith Barney, said he expects the market
to reach a turning point towards end-1999.
"The distinction between winners and losers in this market will become
clearer. We expect that the winners will include Micro Tecnology and NEC,
Toshiba Corp and Samsung Electronics, while Hitachi, Mitsubishi Electric, LG
and Hyundai will be borderline.
"The important point is whether the companies will be able to inject
sufficent capital spending to reduce line width in DRAM chips and boost data
transmission speeds.
"Near term, what they must do is cut line width to 0.20 microns from 0.25
and about a year from now, their target will shift to 0.18 microns," he said,
adding that the four prospective winners have enough technical and financial
strength to achieve this technological advance.
"To survive in the DRAM market, a company must have both finances and
technology," Yoshihara said. |
