Semiconductor Prices Fall and Volume Rises, Keeping Sales Revenue Steady

Semiconductor shipments have been stuck in the $18.0-18.5B range, after our seasonal adjustment, for 15 months through July 2005. But it has not been a steady, dull market for either buyers or sellers. Rather, substantial price and volume changes have been offsetting over the course of an inventory cycle. Shipments revenue is expected to edge slowly higher this fall and through next year. Both average selling prices (ASPs) and unit shipments volume will be increasing. Inventories are now relatively lean throughout the supply and distribution chains. Capacity utilization is moving higher because end-market demand is rising in a strong economy and capacity additions are slowing in response to nine months of falling prices.

During the first six months of the 15-month period of steady shipments revenue, the ASP of an IC increased 10%, but shipments unit volume declined an offsetting 10%. Over the last nine months, prices fell 15% while volume rose an offsetting 15%. Prices have dropped quickly over the last three months. ASIC prices are off 10%, standard logic 20%. Processor prices are up slightly, but are far below their January to June average. Over the same period, flash memory volume has increased 15%, standard logic 19%, ASICs 13% and optoelectronics 12%.

Both prices and volumes are expected to be rising later in 2005. Prices will be boosted by tightening capacity. Fab capacity utilization increased 4 points to 88.8% in the second quarter, according to the latest SIA survey data. Capacity utilization is likely nearer 90% later in the summer, because monthly production data suggest that capacity utilization increased over the quarter. 90% capacity utilization will slow but not stop price erosion. Nonetheless, July's $1.49 ASP for ICs is likely to be the lowest of the year. Processor prices were unusually low in July because of the product mix and timing of new part introductions. Memory prices have firmed in the spot market late in the summer.

Shipments volume will expand at least as fast — and probably faster — as end-market demand increases into 2006 because of current lean inventories in both manufacturing and distribution. Electronic product manufacturers in the United States have reduced their ratio of month-end inventory to sales by 20% in the past year. Other manufacturing end markets have record low inventory/sales ratios. World GDP growth remains near 4%, with the capital goods share still rising late in the expansion cycle. Hurricane Katrina will not have a measurable impact on semiconductor shipments. World GDP will be 0.1% lower in late 2005 and then 0.1% higher early in 2006. The impact of natural disasters always falls most heavily on service and household staples industries.