We’re running a bit behind this week as we have also been working on quarterly data for our market research services.
I had hoped to get a bit more time to write about panel supply and demand. I’ll try to do more for next week, but I thought it would be worth covering the key points. Veterans might want to skip the next paragraph!
The critical point in the health of the panel industry is always the supply/demand balance. The panel industry really has acted according to classical economic models for years. When supply is less than demand, prices go up and panel makers are happy, but device makers are miserable as their costs go up. When panel supply is easy, prices fall and panel makers get miserable while set makers can make better profits. LCD makers, I have said for years, are like farmers. The price of beef goes up? The farmers get more cattle so the price of beef goes down. So they get rid of their cattle. The price of beef goes up, and so it goes on.
The key issue that is causing prices to rise strongly this year is tight supply, relative to the demand. Demand for panels has been growing, partly because buyers of TVs want bigger sets, which takes more glass. However, panel makers are moving to more complex display technologies such as LTPS for mobile devices, or IGZO or very high resolution. All of these cause the effective capacity of the industry to reduce. Normally, at this point in the cycle (known as the Crystal cycle), we’d expect to see Samsung, in particular, introducing extra capacity. Because of the firm’s scale and diversification, it has been able to optimise its investment to time it to arrive when it can make the most money. Other companies, like AUO and LG Display, have typically found it harder to raise the money at the right times.
However, this year, Samsung is actually reducing its large LCD capacity, with the planned closure of a fab at the end of the year. And there are few new fabs from other suppliers and the reason for this is that “the Chinese are coming”. The established suppliers know that Chinese companies, with support from regional and national governments, have huge plans for expansion in LCD making and this makes profits unlikely. So they have stopped investing. On the other hand, the Chinese investments have not yet been built and ramped up to high yields. So we have a gap in supply. The bad news for device makers is that it will be at least a year or so before real capacity comes fully on line. That means that the current tight supply will continue and prices will remain high, at least relatively (frankly, I think that the ridiculously low prices paid for high volume displays is something of a miracle, but that’s just me and I used to sell 17″ CRT monitors for $2,000 each!).
Our friends at IHS Markit estimate that supply of large panels will grow only 2% next year but demand is forecast to rise by more than that. That will mean serious shortages next year. When supply is tight, panel makers have more flexibility to change their ranges and we have seen a number of makers in the small/medium market get out of some shrinking segments completely, allowing the remaining suppliers to substantially increase prices.
If you think it has been tricky so far, buckle in for a bumpy ride!