August 2, 2004 – Solid but slowing global demand is in store for the semiconductor industry in 2H04, with the outlook very much dependent upon a continued rise in capacity utilization and chip inventories, according to the Semiconductor Industry Association (SIA).

Worldwide chip sales (a three-month moving average) grew 2.8% in June to $17.81 billion, a 40.3% increase from a year ago and the fifth consecutive month of >30% year-on-year sales growth. For 2Q04, sales were $53.45 billion, an increase of 9.5% from 1Q and 40.3% from the same period a year ago.

DRAM sales, which have more than doubled in the past year, were the leading driver of 2Q growth, as exhibited by a 13% year-on-year growth in PC sales, according to SIA president George Scalise. With new DRAM production comes online, with transition to smaller die sizes bumping up production, “it is likely that the supply/demand situation will ease going forward,” he added. Also driving sales in 2Q were wireless communications chips (up 86.5% from 2Q03) and optoelectronics devices (up 52.4%). By geographic region, the Asia-Pacific region grew 60.9%, followed by the Americas (29.7%), Europe (28.9%), and Japan (26.3%).

Capacity utilization rates, roughly 93% in 1Q04, rose to the mid-90% range in 2Q, and Scalise noted that utilization and inventories should be closely watched. But despite scattered warnings of inventory buildup (Intel sent investors scurrying after revealing a 10% inventory jump in 2Q), Scalise said overall “customers are continuing to manage inventories very carefully…we do not believe excess inventories will be a problem in most market sectors in the near term.”

While global chip sales are on pace to top a record $214 billion this year, Scalise said sales growth rate in 2H04 would be slower. He predicted 3Q sales would be 4%-6% higher than 2Q, based on analysis of inventories, production capacity, and end-market demand.