Semiconductor Inventories Fall Below Optimal Levels

­After swelling to major excess levels in 2008, global semiconductor inventories in the second quarter of 2009 dwindled to lean, but appropriate, levels, according to iSuppli.

iSuppli believes that in the third quarter, semiconductor suppliers have moved to build inventory to achieve supply and demand equilibrium. As a result, global chip revenue in the third quarter likely will rise by 3 percent more than actual demand would dictate, creating an artificial bump in sales for the industry.

In the second quarter, Days of Inventory (DOI) at semiconductor suppliers fell short of optimal levels by 6.1 percent This represents a vast improvement over the fourth quarter of 2008, when DOI exceeded equilibrium by 14.8 percent.

"Having seen their inventories swell to excess in 2008, semiconductor suppliers acted quickly to reduce inventory," said Carlo Ciriello, financial analyst for iSuppli. "However the pendulum swung too far in the opposite direction in the second quarter, leaving inventories at lean levels."

Despite the below-target semiconductor inventories in the second quarter, there is no imminent danger of chip shortages at this time. With global semiconductor factory utilization at extremely low levels, suppliers can easily boost their manufacturing to meet demand.

In fact, the inventory correction has come as a boon to semiconductor stocks. The Semiconductor HOLDRS Trust index of 18 U.S. chip companies' stock prices rose by 55 percent during the six-month period from March to September, in concert with the drop in inventories.

While the ongoing inventory adjustment may be good news for the supply chain, the semiconductor industry is likely to suffer a harsh return to reality after inventory replenishment concludes.

"The inventory restocking effort will run its course by the end of the third quarter, leaving sales to be driven only by actual end-market demand," Ciriello said. "This will bring an end to the artificial boost in sales and sentiment generated by the inventory rebuilding effort."

Optimal DOI is calculated by iSuppli based on semiconductor demand, and is adjusted for factors including seasonality, revenue fluctuations and margins.

Posted to the site on 29th September 2009