Amid expectations of new demand growth due to the imminent arrival of the peak sales season, global display panel suppliers plan to increase their fab utilization rates slightly.
Overall display fab utilization is expected to total 84 percent in the third quarter, up from 83 percent second quarter, according to the latest Display Production & Inventory Tracker by IHS Markit. This represents a slight improvement compared to the first half of 2019, when utilization lagged far behind levels seen in 2018. In 2019, utilization amounted to 82 percent in the first quarter and 83 percent the second quarter—down from 88 percent and 87 percent in the first and second quarters of 2018.
Suppliers cut production in the first half in response to slower demand and a build-up of inventory that was carried over from 2018.
“In response to limited price increases at the beginning of the second quarter, panel makers had expected LCD-TV panel prices to start rebounding at that time,” said Alex Kang, senior analyst at IHS Markit. “However, the flare-up of the US-China trade dispute and the increase in inventory levels prevented the suppliers from sustaining the price hikes. As a result, panel prices started eroding sharply, prompting panel makers to cut production starting in the middle of the second quarter.”
However, the slash in production and the reduction of glass input resulted in an increase in manufacturing costs—an unsustainable situation for panel suppliers. Panel makers carry extensive fixed costs that they must pay regardless of their utilization levels. Thus, with lower revenue and reduced utilization, the suppliers incur higher manufacturing costs as a percentage of revenue.
“The hot year-end shopping season is approaching, and panel makers expect demand to start recovering. Those expectations are reflected in their increased utilization rate in the third quarter,” Kang said. “Thanks to production controls, panel makers were able maintain their average inventory days in a normal range by the end of the second quarter of 2019.”
While suppliers are planning to raise utilization rates slightly in the third quarter, levels still are expected to remain below last year’s totals. At 84 percent, utilization in the third quarter of 2019 will be well below 88 percent and 90 percent in the third quarters of 2018 and 2017 respectively.
“This means that the third quarter could have better market conditions than first half of this year—but the entire year of 2019 could be worse than the past couple of years," Kang added.
According to IHS Markit, panel makers are expected to maintain conservative fab utilization rates throughout the second half of 2019 because the oversupply situation is not resolved. The low fab utilization outlook will have a negative impact on panel makers’ financial results in the second half of 2019, prompting them to accelerate their fab restructuring efforts. These companies may restructure to decrease fab capacity or shift production to serve more lucrative application markets.
About the IHS Markit Display Production & Inventory Tracker
The IHS Markit Display Production & Inventory Tracker provides detailed updates on the status of fab management and panel maker production, shipments and inventories. It includes a monthly forecast for all panel makers for the next three months. In addition, the tracker examines indicators of future price and supply/demand forecasts, including whether panel makers’ supply capacity continues to exceed panel demand as well as panel makers' fab management, production and inventory strategies.