Connecting the Dots
So as not to use the massively overused word ‘unprecedented’, we choose unparalleled to describe the rise in LCD panel prices over the last year. Panel producers have been enjoying utilization rates in the mid to upper 90s and have been on the right side of negotiations with buyers for almost the entire period. Given that China will represent 54.3% of LCD panel production this year, China’s LCD panel producers have a significant influence on the industry and their actions can set the tone for supply, and while they have been quite happy to continue to increase capacity and push utilization rates to their capacity limits we have been wondering when they might notice a bit of a change in demand.
As we have noted previously, TV panel prices have started to decline, and while they are still far above lows set over the last 24 months, they declined by 10.1% in August and are expected to see another substantial drop (-7.7% est.) when September data is collected. IT panel prices, meaning notebooks, monitors and tablets, have been a bit more positive, still rising in August, but at a slower rate than in the past, and are expected to see a bit of a decline this month, so one might say we have reached some sort of peak and can see a path toward more realistic panel pricing going forward. Demand has obviously weakened a bit, with inventory levels at brands more closely reflecting what they believe they need to meet 4Q demand, and the panic that has filled panel buyer’s hearts for much of this year seems to have turned from “I’ll take it (at any price)” to “I’m good for now”.
Regardless of the circumstances surrounding the reasoning behind the current less frenetic demand profile, the bigger question is how Chinese LCD panel producers will respond. They will be expected to generate the same high margin results in 2H as they did in 1H, which can only be accomplished if they are able to run their fabs at the same high utilization rates that they have in previous months. However this level of production would continue to put pressure on panel prices and while TV panel prices have already begun to decline, overproducing IT panels would be a more serious issue. Many panel producers have moved production from TV panels to IT panel production, with the IT products typically a bit more profitable on an m2 basis. This emphasis on IT panel production has helped panel producers see a bit less of an impact from falling TV panel prices, but leaves them vulnerable to a more leveraged dependency on IT panel production.
If IT panel prices begin to weaken, we would hope that rather than continue to run fabs at high utilization rates and exert pressure on IT panel prices, Chinese producers would lower utilization rates, essentially reducing capacity. They would have to deal with lower margins, but would not start a cycle of continuing pressure on panel prices. It seems that such an event is actually occurring, as we are beginning to hear that Chinese LCD panel producers have lowered utilization rates a bit this month. If this proves to be the case, and it is not just a minimal change, the industry could sidestep what would be a typical cyclical decline in panel prices and a similarly typical decline in panel producer profitability. Hard utilization data is ephemeral at best, so we have to accept that panel pricing, albeit on a bit of a lag, is the ultimate arbiter of whether panel producers reacted correctly to weakening demand and stabilized panel prices in 4Q, but it is rare that the industry does not over or under step what would need to be done to keep things in harmonious balance. “The best-laid plans of mice and men often go awry”
As we have noted previously, TV panel prices have started to decline, and while they are still far above lows set over the last 24 months, they declined by 10.1% in August and are expected to see another substantial drop (-7.7% est.) when September data is collected. IT panel prices, meaning notebooks, monitors and tablets, have been a bit more positive, still rising in August, but at a slower rate than in the past, and are expected to see a bit of a decline this month, so one might say we have reached some sort of peak and can see a path toward more realistic panel pricing going forward. Demand has obviously weakened a bit, with inventory levels at brands more closely reflecting what they believe they need to meet 4Q demand, and the panic that has filled panel buyer’s hearts for much of this year seems to have turned from “I’ll take it (at any price)” to “I’m good for now”.
Regardless of the circumstances surrounding the reasoning behind the current less frenetic demand profile, the bigger question is how Chinese LCD panel producers will respond. They will be expected to generate the same high margin results in 2H as they did in 1H, which can only be accomplished if they are able to run their fabs at the same high utilization rates that they have in previous months. However this level of production would continue to put pressure on panel prices and while TV panel prices have already begun to decline, overproducing IT panels would be a more serious issue. Many panel producers have moved production from TV panels to IT panel production, with the IT products typically a bit more profitable on an m2 basis. This emphasis on IT panel production has helped panel producers see a bit less of an impact from falling TV panel prices, but leaves them vulnerable to a more leveraged dependency on IT panel production.
If IT panel prices begin to weaken, we would hope that rather than continue to run fabs at high utilization rates and exert pressure on IT panel prices, Chinese producers would lower utilization rates, essentially reducing capacity. They would have to deal with lower margins, but would not start a cycle of continuing pressure on panel prices. It seems that such an event is actually occurring, as we are beginning to hear that Chinese LCD panel producers have lowered utilization rates a bit this month. If this proves to be the case, and it is not just a minimal change, the industry could sidestep what would be a typical cyclical decline in panel prices and a similarly typical decline in panel producer profitability. Hard utilization data is ephemeral at best, so we have to accept that panel pricing, albeit on a bit of a lag, is the ultimate arbiter of whether panel producers reacted correctly to weakening demand and stabilized panel prices in 4Q, but it is rare that the industry does not over or under step what would need to be done to keep things in harmonious balance. “The best-laid plans of mice and men often go awry”
Aggregate TV Panel Pricing & ROC - 2019 - 2021 YTD - Source: SCMR LLC, IHS, Company Data
Aggregate Monitor Panel Pricing & ROC - 2019 - 2021 YTD - Source: SCMR LLC, IHS, Company Data
Aggregate Notebook Panel Pricing & ROC - 2019 - 2021 YTD - Source: SCMR LLC, IHS, Company Data Taking a Shot
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