Chips rally on hope, not evidence, of a turnaround
By Tarmo Virki, European technology correspondent
HELSINKI, April 7 (Reuters) - Shares in top semiconductor companies have outperformed rising markets in recent weeks, but there is scant evidence of a pick-up in demand for electronic goods to sustain that rally.
Texas Instruments TXN.N said on March 9 that orders had started to improve in January and February, and since then others, including TSMC (2330.TW), Samsung (005930.KS) and Hynix (000660.KS), have also reported some scraps of comfort, but it has been mostly of the cold variety.
Alongside its slightly improved orders, Texas Instruments also noted chip demand was still dropping and there was no recovery in sight, and a boost for Hynix from higher DRAM chip prices was a consequence not of rising demand but of hugely reduced supply.
"We are starting to see some positive news for the first time in a long time, but we don't think it's a start of a sustained recovery," said Gartner analyst Jon Erensen.
Erensen and other analysts say the positive news has been mostly caused by chip buyers' inventory management after savage destocking, not an upturn in demand.
Still, shares in the sector have made much of little.
STMicro (STM.PA) shares have jumped 36 percent since March 9, while Infineon (IFXGn.DE) has almost tripled as improved sentiment has eased fears of potential financing problems.
In North America Texas Instruments is up 13 percent, Qualcomm (QCOM.O) has added 23 percent, and Intel (INTC.O) 26 percent.
In Asia, Hynix has rallied 74 percent, while other makers of DRAM memory chips, used mainly in PCs, have jumped on recovery hopes and on Taiwan's plans to restructure the sector.
"There's a little bit of rebound in expectations," said Dale Ford, a senior analyst at research firm iSuppli, adding many companies decided to use their worst-case scenario when forecasting 2009 due to the poor visibility.
"Companies are starting to get a better feel of the magnitude of the downturn -- they are starting to step back and say it's not going to be as bad. It's going to be bad, but not as bad," Ford said.
While the chip industry's history is marked with volatile cycles of shortages and oversupply, this time it faces a challenge that production cuts alone cannot solve, as consumers around the globe cut spending due to the economic downturn.
Consumer demand across Europe remains in the doldrums amid rising unemployment and fears of a deep recession, despite big cuts in interest rates and unprecedented government efforts to stimulate growth.
Demand in emerging markets has also started to slow as weaker local currencies increase prices.
"People have become very cautious. They do not purchase, or if they do, they go for cheaper products," Erensen said.
WIDESPREAD WEAKNESS
For the chip industry's key markets -- personal computers and cellphones -- forecasts for 2009 make grim reading.
Sales of PCs are expected to fall 12 percent, with sales in emerging markets contracting for the first time, while cellphone sales are expected to shrink 10 percent.
"We believe that the deteriorating macroeconomic conditions are likely to weigh on the fundamentals of the semiconductor industry until the end of 2009," First Global analysts said in a note dated March 26.
"A slowdown in the global GDP will cause widespread weakness on the demand front," they said.
Industry analysts say the semiconductor market is set to shrink more than 20 percent this year.
Some help for the industry could come from forced consolidation in the DRAM industry, where analysts say some producers will have to maintain utilisation rates of under 50 percent this year due to tight cash and low prices.
The $20 billion DRAM industry has been mired in its worst-ever downturn for the last two years, with all major players reporting losses on their operations.
Germany's Qimonda QMNDQ.PK filed for insolvency in January, and the Taiwanese government is trying to restructure the island's moribund chip industry.
A senior Samsung (005930.KS) executive expects supply shortages to crop up in the global memory-chip market after severe cutbacks in production last year. [nN26522744]
"You're going to start to see spot shortages here and there," Jim Elliott, Samsung's vice president of Memory Marketing for the Americas, said in a recent interview.
And though Elliott said that could signal that the industry "could be moving toward some sort of recovery", it is indicative more of past weakness than future strength.
(Additional reporting by Clare Baldwin in San Francisco, editing by Will Waterman)
((tarmo.virki@reuters.com, +358-9-680 50 235, Reuters Messaging: tarmo.virki.reuters.com@reuters.net)) Keywords: SEMICONDUCTORS/ Keywords: SEMICONDUCTORS/ =2 HELSINKI
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