iSuppli slashes 2005 chip outlook on energy, manufacturing woes

September 9, 2005 – Citing rising energy prices exacerbated by Hurricane Katrina, and a “troubling” production rampup even as prices and overall growth continue to slide, iSuppli Corp. has cut its forecast in half for worldwide semiconductor sales in 2005, to just a 2.4% increase to $232.7 billion, vs. projections of 5.9% growth set earlier this summer.

Two main factors spurred the El Segundo, CA-based analyst firm to tweak its projections. First, global energy prices are rapidly rising in 2H05, due in large part to Hurricane Katrina’s devastation on the Gulf Coast. Katrina’s impact on the semiconductor industry is still unclear, but “at the very least the catastrophe will exacerbate the market’s energy problems in the short term,” said iSuppli, in a statement.

Also, in what iSuppli notes as “a troubling sign,” chip suppliers are increasing production despite slowing growth and weakening prices. Global semiconductor capacity is expected to grow 3.1% sequentially in 3Q05, with utilization rates rebounding to 86% from 83% in the prior quarter. If end demand does not significantly increase, there will be a slowdown in manufacturing run rates in 4Q05, said Len Jelinek, iSuppli’s director and principal analyst for semicondutor manufacturing.

While casting a dark cloud over the industry’s 2H05 performance, iSuppli has slightly improved its view of 2006, albeit nothing in the realm of the type of cyclical recovery the industry has become used to. According to the analyst firm’s new calculations, 2005 will mark the industry’s low point over the next five years, followed by 4.3% growth in 2006 (a sliver better than previously-pegged 3.9% growth). From 2007-2009 chip sales are seen expanding by double-digits (10%-11%) each year, resulting in compound annual growth rate of 8% from 2004-2009.

In the near term, though, slowing growth rates will extend into 1H06, predicted Gary Grandbois, principal analyst for analog ICs/semiconductor forecast at iSuppli. “Although 2006 will be an improvement over 2005, it still will be a very slow year for semiconductor sales growth.” Growth will pick up again by late 2006 and into 2007, “but at a somewhat slower recovery pace than seen in the past.”


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