Corning – Key Points
Corning (GLW) reported strong 4Q results, driven by display, optical, and specialty materials. To put the display side in perspective, we note that 1H 2016 was characterized by very weak panel pricing and slowing display volumes, while 2H 2016 saw increasing panel pricing and moderate volumes, which makes GLW’s display results all the more significant, but the key last year, and likely again this year is glass price declines. The company has indicated that they expect glass price declines to be ~10% this year, and possibly better, which implies 2016 glass price declines of 12% to 13% (~1%/month). We note that during other industry cycles we believe price declines have peaked at ~2%, so GLW has been seeing very moderate pricing pressure for the last year or so.
Why is this, especially during 1H last year when panel prices were dropping precipitously? Here’s why… the display glass market is a triopoly[1], with Corning, Asahi Glass (5201.JP), and NEG (5214.JP) being the major players. There are others, such as AvanStrate (Pvt), St. Gobain (SGO.FP), Schott AG (pvt), and a few small Chinese producers, but the display glass business is allocated primarily among the top three, particularly as it refers to large panel display production. In previous display cycles the three primaries were focused on gaining market share, which meant discounting to attract new customers or increasing penetration at existing ones. While sometimes successful on a short-term basis, inevitably share changed little long-term, and took a big chunk out of profitability. After the last display downturn cycle, glass manufacturers changed their focus from share to profitability and reduced capacity expansion to match demand. This philosophy has changed the display glass supply/demand picture since then, and while Corning still maintains better profitability and a higher share than the others, glass pricing declines have moderated and continue to do so.
This glass price moderation comes during periods when capacity demands have been relatively modest, with average display size increases keeping overall glass demand positive, again particularly on large panel (TV) displays. With only three major players, a more rational approach to glass capacity expansion has led to glass price declines of less than 1%/month. This coupled with the need for display producers to be guaranteed a percentage of total capacity from their chosen glass supplier, especially when display utilization rates are high, as they are currently, leads to a strong glass pricing environment, as we see now.
The next question is ‘How long can it continue?”. Has this been a sea change across the industry or is it just another cyclical bump? According to most glass producers, better glass pricing is endemic to the industry, but even Corning, the market leader, while optimistic for the year, understands that things do change, and the industry has been operating under a positive panel price scenario for the last three quarters, and panel producers are more interested in keeping utilization rates near 100% to capture that positive panel pricing than they are about material cost[2]. They need glass to keep their lines moving and price is less of an object than guaranteed volume. We believe this means logically that should the panel pricing environment begin to shift back to negative pricing, we could see some pressure on glass pricing return. We doubt it would have an immediate impact on display glass producer results, but a sustained or aggressive downward panel pricing trend would imply either a supply situation trending toward oversupply, or a weakening of demand, either on a unit volume basis or a screen size basis. While the oversupply situation would be far better for display glass suppliers, as volumes would still be high despite weaker glass pricing, a slowing of display panel size increases would imply lower glass volumes and lower glass prices, the worst of the two scenarios. If the three glass suppliers react by shuttering capacity, the industry will remain tight, even in the later scenario, so the answer to the question of ‘How long can it continue?’ is less a question of panel pricing and more a question of how the glass producers react to it.
But wait, there’s more…Corning’s display glass business is profitable, with display margins topping 30%, but competitor display glass margins, who have broader glass businesses, are lower, and in some cases close enough to breakeven that a return to more aggressive price declines could push results to or near loss levels. While this is not the case currently, it does put into question any potential glass production capacity increases that might be needed over the next few years. Corning has glass producing assets that can be converted to or from display glass, a portion of which came from its purchase of the Samsung/Corning JV, but others are less flexible, particularly as float glass melters are built out on a larger scale than the Corning more modular tanks. This gives Corning a competitive advantage in such situations, something the company is not shy about espousing, but it does not protect the display glass industry from a return to more aggressive negative pricing should the panel producers find themselves in more of a buyers’ than sellers’ market. We are not predicting same, just pointing out the scenarios, as we have learned over years in the display space that things change on a daily basis which makes predictions good until the next morning. We have a bias toward a somewhat less benign panel pricing environment for this year, but we do not expect much of an impact on glass pricing until 2018. As to Corning’s specialty glass business (aka Gorilla Glass, we will have more commentary over the next few days.
Display
4Q – GLW glass volume down slightly q/q – up low teens y/y
4Q – glass prices declined less than 3Q
2016 – Glass demand up mid-single digits (in line w. expectations)
2016 – GLW glass demand up mid-single digits (in line w. industry)
2016 – TV screen size up 1.5”+
2016 – Supply chain inventory lean
1Q – Expect GLW glass volume up mid-teens y/y – in line w. market – Down q/q on lower capacity and shorter quarter
1Q – Q/Q price declines moderate (usually the biggest declines yearly)
2017 – Retail glass market up mid-single digits
2017 – TV units flat to up 1%
2017 – TV screen size up 1.5”
2017 – Glass demand up 4% to 5%
2017 – IT (monitors, NB) down in units, up in screen size – Net flat
2017 – Supply chain inventory lean
2017 – Overall glass demand up mid-single digits
2017 – GLW glass demand up mid-single digits
2017 – Panel capacity will increase during the year
2017 – Glass price declines less than 2016 (smallest in last 5 yrs)
2017 – Price declines (yearly) could be 10% or better
Specialty Materials
4Q – Sales up 22% (above expectations of high teens)
4Q – Record GG volume (rapid GG5 adoption)
4Q – GG5 premium pricing
1Q – GG5 Premium pricing to continue
1Q – Expect high teens growth y/y
2017 – Secondary supply chain driven by new products not calendar
2017 – Expect Specialty Material growth in 2017 but adoption (GG5) will be key
1Q TV panel shipments down q/q but edge up y/y, maybe?
According to Taiwan based Witsview, TV panel shipments declined 10.7% q/q in 1Q 2017, but were up 0.4% on a y/y basis. We note that March is typically the ‘seasonal recovery month’, as TV panel shipments are usually weakest in January and February, after the holiday selling season. We note also that there tends to be differences between data sources on actual panel shipments, with others indicating an 11.5% q/q decline and a 2.9% y/y decline thus far. We average sources as the data come in.
As can be seen from table 1, Samsung Display (pvt) saw a significant drop in TV panel shipments as it began converting LCD fabs to small panel OLED, and reduced the Korean share to 35.7%. China continues to gain share at 30.5% in 1Q and will likely surpass South Korea later this year or early next, as China adds capacity and Samsung Display reduces its large panel LCD exposure.
[1] rule or domination by three persons, parties, or entities – (under review)
[2] Not to say they don’t care about glass price, but it is less of an onus than when display pricing is weak
Why is this, especially during 1H last year when panel prices were dropping precipitously? Here’s why… the display glass market is a triopoly[1], with Corning, Asahi Glass (5201.JP), and NEG (5214.JP) being the major players. There are others, such as AvanStrate (Pvt), St. Gobain (SGO.FP), Schott AG (pvt), and a few small Chinese producers, but the display glass business is allocated primarily among the top three, particularly as it refers to large panel display production. In previous display cycles the three primaries were focused on gaining market share, which meant discounting to attract new customers or increasing penetration at existing ones. While sometimes successful on a short-term basis, inevitably share changed little long-term, and took a big chunk out of profitability. After the last display downturn cycle, glass manufacturers changed their focus from share to profitability and reduced capacity expansion to match demand. This philosophy has changed the display glass supply/demand picture since then, and while Corning still maintains better profitability and a higher share than the others, glass pricing declines have moderated and continue to do so.
This glass price moderation comes during periods when capacity demands have been relatively modest, with average display size increases keeping overall glass demand positive, again particularly on large panel (TV) displays. With only three major players, a more rational approach to glass capacity expansion has led to glass price declines of less than 1%/month. This coupled with the need for display producers to be guaranteed a percentage of total capacity from their chosen glass supplier, especially when display utilization rates are high, as they are currently, leads to a strong glass pricing environment, as we see now.
The next question is ‘How long can it continue?”. Has this been a sea change across the industry or is it just another cyclical bump? According to most glass producers, better glass pricing is endemic to the industry, but even Corning, the market leader, while optimistic for the year, understands that things do change, and the industry has been operating under a positive panel price scenario for the last three quarters, and panel producers are more interested in keeping utilization rates near 100% to capture that positive panel pricing than they are about material cost[2]. They need glass to keep their lines moving and price is less of an object than guaranteed volume. We believe this means logically that should the panel pricing environment begin to shift back to negative pricing, we could see some pressure on glass pricing return. We doubt it would have an immediate impact on display glass producer results, but a sustained or aggressive downward panel pricing trend would imply either a supply situation trending toward oversupply, or a weakening of demand, either on a unit volume basis or a screen size basis. While the oversupply situation would be far better for display glass suppliers, as volumes would still be high despite weaker glass pricing, a slowing of display panel size increases would imply lower glass volumes and lower glass prices, the worst of the two scenarios. If the three glass suppliers react by shuttering capacity, the industry will remain tight, even in the later scenario, so the answer to the question of ‘How long can it continue?’ is less a question of panel pricing and more a question of how the glass producers react to it.
But wait, there’s more…Corning’s display glass business is profitable, with display margins topping 30%, but competitor display glass margins, who have broader glass businesses, are lower, and in some cases close enough to breakeven that a return to more aggressive price declines could push results to or near loss levels. While this is not the case currently, it does put into question any potential glass production capacity increases that might be needed over the next few years. Corning has glass producing assets that can be converted to or from display glass, a portion of which came from its purchase of the Samsung/Corning JV, but others are less flexible, particularly as float glass melters are built out on a larger scale than the Corning more modular tanks. This gives Corning a competitive advantage in such situations, something the company is not shy about espousing, but it does not protect the display glass industry from a return to more aggressive negative pricing should the panel producers find themselves in more of a buyers’ than sellers’ market. We are not predicting same, just pointing out the scenarios, as we have learned over years in the display space that things change on a daily basis which makes predictions good until the next morning. We have a bias toward a somewhat less benign panel pricing environment for this year, but we do not expect much of an impact on glass pricing until 2018. As to Corning’s specialty glass business (aka Gorilla Glass, we will have more commentary over the next few days.
Display
4Q – GLW glass volume down slightly q/q – up low teens y/y
4Q – glass prices declined less than 3Q
2016 – Glass demand up mid-single digits (in line w. expectations)
2016 – GLW glass demand up mid-single digits (in line w. industry)
2016 – TV screen size up 1.5”+
2016 – Supply chain inventory lean
1Q – Expect GLW glass volume up mid-teens y/y – in line w. market – Down q/q on lower capacity and shorter quarter
1Q – Q/Q price declines moderate (usually the biggest declines yearly)
2017 – Retail glass market up mid-single digits
2017 – TV units flat to up 1%
2017 – TV screen size up 1.5”
2017 – Glass demand up 4% to 5%
2017 – IT (monitors, NB) down in units, up in screen size – Net flat
2017 – Supply chain inventory lean
2017 – Overall glass demand up mid-single digits
2017 – GLW glass demand up mid-single digits
2017 – Panel capacity will increase during the year
2017 – Glass price declines less than 2016 (smallest in last 5 yrs)
2017 – Price declines (yearly) could be 10% or better
Specialty Materials
4Q – Sales up 22% (above expectations of high teens)
4Q – Record GG volume (rapid GG5 adoption)
4Q – GG5 premium pricing
1Q – GG5 Premium pricing to continue
1Q – Expect high teens growth y/y
2017 – Secondary supply chain driven by new products not calendar
2017 – Expect Specialty Material growth in 2017 but adoption (GG5) will be key
1Q TV panel shipments down q/q but edge up y/y, maybe?
According to Taiwan based Witsview, TV panel shipments declined 10.7% q/q in 1Q 2017, but were up 0.4% on a y/y basis. We note that March is typically the ‘seasonal recovery month’, as TV panel shipments are usually weakest in January and February, after the holiday selling season. We note also that there tends to be differences between data sources on actual panel shipments, with others indicating an 11.5% q/q decline and a 2.9% y/y decline thus far. We average sources as the data come in.
As can be seen from table 1, Samsung Display (pvt) saw a significant drop in TV panel shipments as it began converting LCD fabs to small panel OLED, and reduced the Korean share to 35.7%. China continues to gain share at 30.5% in 1Q and will likely surpass South Korea later this year or early next, as China adds capacity and Samsung Display reduces its large panel LCD exposure.
[1] rule or domination by three persons, parties, or entities – (under review)
[2] Not to say they don’t care about glass price, but it is less of an onus than when display pricing is weak
TV Panel Shipments - Units - Source: SCMR LLC, IHS, Company Data
TV Panel Shipments 1Q 2017 - Source: Witsview 4/2017
Chinese Raw Capacity - Source: SCMR LLC, Displaysearch, Company Data
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