Biting the Bullet - Is It Enough?
months is dependent on reducing panel inventory across the industry. This is accomplished through utilization reductions at panel producers, who must take a hit to margins from the lower utilization rate or continue to over-produce and worsen the panel inventory overload, pushing panel prices lower. This has always been a difficult choice for panel producers, especially after such a strong boom cycle last year, and resistance to such cuts is always high, but there are few alternatives, especially when many raw material and component prices are rising.
While each panel producer must make utilization cuts based on orders, estimates, and targets from customers, the temptation is to err on the low side and maintain production at the highest levels possible, and that has a tendency to extend the period during which utilization cuts are necessary, so we try to gain insight into how deep panel producers are making the cuts as an indication of how long it will take to work down inventory, and how much panel producer performance will be affected by the cuts themselves.
There is a certain amount of granularity here also, with vastly different utilization rates at LCD fabs vs. OLED fabs, and even more granularity across fab substrate generations, as fabs Gen 6 and below tend to be used for IT and mobile device displays, and fabs above Gen 6 being used for TV displays, although with gaming monitor sizes reaching TV size, those lines are blurring somewhat, and utilization rates ay ultra-large (Gen 10/11) LCD fabs, which are for TV displays 65” and larger, provides even more granularity.
Panel producers tend to keep this data to themselves given the competitive nature of the business, but occasionally enough data becomes available to make such calculations with some sort of accuracy, although there are many assumptions that have to be made and doddering opinions on those assumptions, but to us the important point is how much utilization rates change during periods of panel price declines and periods of excess inventory vs. orders and shipments. As Chinese LCD producers now represent ~66.1% of Gen 7+ capacity, they hold sway over how their production rates will affect large panel prices, and consequently we pay close attention to whatever data we can derive concerning changes to their utilization rates.
According to our most recent data, we estimate that the utilization rate across all Chinese LCD fabs was ~84.9% in May, down ~3.5% from April and down 8.1% relative to January. A relatively small m/m drop in May. With small panel LCD fabs seeing a 3.2% decline in May (m/m) and ultra-large format LCD fabs seeing only a 2% drop m/m. With the largest producers such as BOE (200725.CH), Chinastar (pvt), and HKC (248.HK) seeing m/m declines between 3.1% and 6.1%, it would seem smaller producers have made only small adjustments to utilization rates on the Mainland. We calculate that the cuts in May would reduce inventory production by ~600,000 m2 of capacity, or the equivalent of ~515,000 65” TVs out of ~15m that could be produced monthly.
It the industry, particularly Chinese LCD producers, expect to work down inventories the reductions seen in May would likely not be enough to stem the tide of panel price declines and inventory glut, but there is a reason why the cuts tended not to be deep in May, and that is that panel fabs tend to operate a breakeven at a utilization rate of ~85%, and while this is a generalization across a wide variety of producers and fab operations, cutting utilization below this point across the industry tends to lead to a general lack of profitability for producers. The problem is that with inventory levels still high and demand low, along with raw material and component costs that are not absorbed by customers, further utilization cuts are necessary to shorten the time it takes to reduce inventory levels before the holidays.
We expect that further utilization cuts were made at Chinese LCD fabs this month, likely bringing the average LCD utilization rate to between 78.5% and 79.0%, which will hopefully be sustained in July, which we believe would be enough to al least bring down inventory levels to more reasonable levels based on current demand. Whether that happens will depend on how much of the ‘bullet’ Chinese panel producers are willing to bite
While each panel producer must make utilization cuts based on orders, estimates, and targets from customers, the temptation is to err on the low side and maintain production at the highest levels possible, and that has a tendency to extend the period during which utilization cuts are necessary, so we try to gain insight into how deep panel producers are making the cuts as an indication of how long it will take to work down inventory, and how much panel producer performance will be affected by the cuts themselves.
There is a certain amount of granularity here also, with vastly different utilization rates at LCD fabs vs. OLED fabs, and even more granularity across fab substrate generations, as fabs Gen 6 and below tend to be used for IT and mobile device displays, and fabs above Gen 6 being used for TV displays, although with gaming monitor sizes reaching TV size, those lines are blurring somewhat, and utilization rates ay ultra-large (Gen 10/11) LCD fabs, which are for TV displays 65” and larger, provides even more granularity.
Panel producers tend to keep this data to themselves given the competitive nature of the business, but occasionally enough data becomes available to make such calculations with some sort of accuracy, although there are many assumptions that have to be made and doddering opinions on those assumptions, but to us the important point is how much utilization rates change during periods of panel price declines and periods of excess inventory vs. orders and shipments. As Chinese LCD producers now represent ~66.1% of Gen 7+ capacity, they hold sway over how their production rates will affect large panel prices, and consequently we pay close attention to whatever data we can derive concerning changes to their utilization rates.
According to our most recent data, we estimate that the utilization rate across all Chinese LCD fabs was ~84.9% in May, down ~3.5% from April and down 8.1% relative to January. A relatively small m/m drop in May. With small panel LCD fabs seeing a 3.2% decline in May (m/m) and ultra-large format LCD fabs seeing only a 2% drop m/m. With the largest producers such as BOE (200725.CH), Chinastar (pvt), and HKC (248.HK) seeing m/m declines between 3.1% and 6.1%, it would seem smaller producers have made only small adjustments to utilization rates on the Mainland. We calculate that the cuts in May would reduce inventory production by ~600,000 m2 of capacity, or the equivalent of ~515,000 65” TVs out of ~15m that could be produced monthly.
It the industry, particularly Chinese LCD producers, expect to work down inventories the reductions seen in May would likely not be enough to stem the tide of panel price declines and inventory glut, but there is a reason why the cuts tended not to be deep in May, and that is that panel fabs tend to operate a breakeven at a utilization rate of ~85%, and while this is a generalization across a wide variety of producers and fab operations, cutting utilization below this point across the industry tends to lead to a general lack of profitability for producers. The problem is that with inventory levels still high and demand low, along with raw material and component costs that are not absorbed by customers, further utilization cuts are necessary to shorten the time it takes to reduce inventory levels before the holidays.
We expect that further utilization cuts were made at Chinese LCD fabs this month, likely bringing the average LCD utilization rate to between 78.5% and 79.0%, which will hopefully be sustained in July, which we believe would be enough to al least bring down inventory levels to more reasonable levels based on current demand. Whether that happens will depend on how much of the ‘bullet’ Chinese panel producers are willing to bite
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