A recent report by DisplayBank attempted to roll up the world wide LCD production capacity and juxtaposition that with LCD panel demand data to get at a magical number called the oversupply capacity ratio for the LCD industry. If the DisplayBank crystal ball is clear the industry will see this number jump from a 3.6% oversupply in 4Q’05 to15% in 3Q’06 and tapering off to 13% by the last quarter of 2006.
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The report is precipitated in part by a hot display selling season, that saw shortages in large display sizes and technologies like PDPs and LCD TVs and the knee jerk reaction by individual suppliers to increase panel production to keep pace with demand. In fact, as recently as today, CMO announced it would move up volume production at its second Gen 5 plant by two months, with the goal of processing 150K substrates per month. It will target 40-inch LCD TVs.
Add to this the other Taiwanese manufacturers, Sharp’s recent expansion plans, the two Korean tigers and you’ve got a whole lot of flat panel capacity to soak up. But forecasting the supply side is a relatively easy exercise that includes tracking the announcements and adding up the various production capacities.
Let’s review what happened in 2005. According to DisplayBank, a 10.7% oversupply capacity ratio in 1Q’05 led to a 12.2% rise in demand from the first to second quarters of 2005. The following quarters saw subsequent rises in demand of 18% for 3Q and 15.3% for 4Q’05. Meanwhile, the oversupply capacity ratios came in at 4.6%, 6.9% and 3.6% in those same periods. No doubt this initial oversupply helped drive large LCD TV prices down to unprecedented levels sparking demand early in the year that built up to a crescendo in the Christmas 2005 buying season. To put it mildly, demand was robust and it absorbed most of the capacity. Shortages were more likely a result of improper allocation of manufacturing of certain screen sizes to meet demand in those screen sizes.
In 2005, the oversupply capacity ratio tapered off because demand steadily increased with each new round of price cuts. Consumers suddenly found their TV purchasing dollar would buy a sleek new HD flat panel for what they paid for the bulky RPTV just two years prior. This, plus a global migration to digital broadcast standards continue to spur the market demand to this day.
In 2006, demand will not increase fast enough to absorb the growth in capacity leading to increasing oversupply. In 2006, DisplayBank sees a mere 3.3% growth in demand in 1Q, rising to a peak of 9.1% in 4Q with an average growth in demand of 6.4% for the year. That’s down almost 9% year over year from the torrid 15.2% average demand growth in 2005.
So why is 2006 demand growth going to be different from 2005? DisplayBank doesn’t say.
Frankly, we don’t see many signs of a demand slowdown. In fact, we see continued market strength coming as CE retailers (here in the US anyway) are now talking of “Christmas II” - a period of growth in flat panel display sales, spurred on by the HD broadcast of College bowl programming and the playoffs leading to the upcoming Superbowl. And don’t forget about the Olympics and the World Cup events. This will drive demand for HDTVs in a big way.
Will there be an oversupply of LCD panels in 2006? The answer is most certainly yes given the magnitude of capacity expansion planned. The more important question to ask is about the sustainability of demand growth. We will keep you up to date on this one.-SS
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