Chip prices expected to continue to fall

Despite an ongoing inventory correction in the global semiconductor sector this quarter, chip prices will continue to decline until early next year, dragged down by mild overcapacity and semiconductor stockpiles, the research house iSuppli Corp announced.

"Excessive semiconductor stockpiles in the global supply chain are expected to decline to less than US$500 million in value by the end of the second quarter, down 21 percent from US$630 million at the end of the first quarter," the El Segundo, California-headquartered research institute said in a report released last week.

iSuppli attributed the downtrend in chip stockpiles worldwide to healthier-than-expected market conditions in the second quarter, bolstered by strong sales of mobile personal computers, networking gear for businesses, mobile phones and digital video players.

Global semiconductor inventory swelled to some US$1.62 billion in the third quarter of last year, which caused an industry slowdown in the second half of last year.

Despite the optimistic forecast about semiconductor inventory, chip prices are expected to continue to drop throughout this year until the first quarter of next year, iSuppli predicted.

"The overall semiconductor average selling price [ASP] has been in a state of freefall," the report read, "ASP declined during every quarter of 2004, except the first. Pricing is expected to remain on the decline through the first quarter of 2006."

Overall, ASP is estimated to decrease by over 1 percent this quarter from the previous quarter, which is an improvement from the slide of over 3 percent seen in the January to March period, according to the research house.

Prices are expected to drop by 2 percent quarter-on-quarter in the third quarter and continue to fall at a similar rate until the first quarter of next year, iSuppli said.

In line with the research house's prediction, Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), the world's biggest made-to-order chipmaker, told foreign investors in late April that it expects ASP to decline by 4 percentage points to 6 percentage points sequentially in the current quarter, with its capacity utilization rate rising to about 80 percent.

Similarly, United Microelectronics Corp (UMC, 聯電), the world's second largest contract chipmaker, said earlier this month that it expects ASP to fall by a high single-digit percentage point from the first quarter, while second-quarter capacity utilization should decline to 60 percent, from 63 percent in the first quarter.

The research institute attributed the current price erosion to a slowdown in semiconductor sales. Sales are expected to expand by 6.1 percent this year, down significantly from a 24 percent rise last year, depressed by decelerating shipments of electronic equipment on the demand side.

On the supply side, semiconductor manufacturers began to add capacity despite softening sales, iSuppli said, adding that although overcapacity is modest compared to the downturn last year, it is having an impact on pricing.

Meanwhile, the excessive inventory, even though down significantly from its peak last year, is depressing ASP as well, it said.

Together, these factors would mean reduced profitability for semiconductor suppliers but better availability and prices for buyers, iSuppli added.