Q3’10 Preview: as Good as It Gets

Key Thoughtz

• Cyclical trends persist: 1H’10 saw a cycle peak and 2H’10 will see a sharp decline in AMLCD prices.
• Secular trends persist: the cash cost of AMLCD decreases more slowly than sales revenue does.
• Taiwanese AMLCD producers remain in trouble and in need of Chinese alliances.

Read more in the downloadable file(s):

Abstract — As we write this, newspapers in Taiwan report sharp cuts in AMLCD fab utilization and panel prices in 2H'10. Our Capacity Acceleration Price Indicator (CAPi) has been pointing to Q2’10 as a cycle peak and to Q4’10 as a cycle trough for some time now, so such reports confirm the signal. Q3’10 will be a turning point in the next AMLCD business cycle.

In this commentary, we examine cyclical and secular trends in the AMLCD industry then focus on troubles in Taiwan where producers seek access to Chinese capital. Analysis of their operating results over the past two business cycles (six years) provides the basis for predictions of coming quarters.

AUO + LGD Areal Price Deviation and the Capacity Acceleration Price Indicator, Q1’01–Q2’10

Source: BizWitz analysis of CMO disclosures.

When we plot CAPi with the percentage price deviation from the historical 19% price decay line, we see that CAPi predicts cyclical price declines when it falls below zero. In 2006 and 2007, CAPi signaled a cycle bust would occur in 2H’08. That signal was not received well. Industry sentiment was decidedly bullish. Thus, clients who acted on CAPi were spared the worst effects of the bust in 2008. From our perspective then, the industry was headed toward a cyclical bust even if macroeconomic conditions remained positive in 2008.

The main effect of the credit crisis (aka Great Recession) was capacity utilization reduction. In prior business cycles, some AMLCD producers reduced utilization towards 75% but producers responded to the supply surge by reducing prices primarily. In 2008, some producers stopped lines, thereby reducing their asset utilization below 50%. Returning to the traffic analogy, when producers tapped their breaks, suppliers in cars behind them came to panic stops. Key suppliers with continuous processes (e.g. glass foundries) shut plants down. Time lags resulting from need to rehire and restart exacerbated demand shortfalls as downstream inventories were depleted in early 2009. Producers could raise prices under such short supply conditions.

And raise them they did. Plant closures and construction stoppages reduced panel supply and planned expansion. As in prior cycles, flat capacity led to rising prices as brands bid higher to obtain panels. Also, as in prior cycles, rising prices encouraged producers to reinvest in more capacity. So, while the percentage increase in total capacity is moderate, the acceleration of capacity sends the CAPi down sharply. For more insight, download Q3'10 Preview.