Semiconductor Beat

Last Friday the Semiconductor Industry Association (SIA) released its global semiconductor sales report. Worldwide sales of semiconductors totaled $20.1 billion in July, up over 11.5 percent from July 2005.

“Capital spending and capacity utilization continue to be in balance,” (SIA President George) Scalise noted.  Capital spending in 2006 is expected to amount to approximately 22 percent of semiconductor sales, which is in line with anticipated technology requirements and anticipated sales growth.  Capacity utilization edged up slightly in the second quarter of the year, from 89 percent to 91 percent, with leading-edge capacity at 97 percent.

Our readers know we have a different perception of capacity expansion. While the growth in semiconductor sales has accelerated in recent months, growth in orders for new equipment have accelerated even faster. In fact, such orders were up nearly 74% from last year in July.

We suspect Scalise is speaking from the corner of his mouth, as the orders will not become sales for a few months. So, technically, spending relative to sales will be “in line with requirements” in 2006. But in 2007 - whoa Nellie!

Here is the latest update of our chart comparing year/year semiconductor sales as reported by the SIA with year/year equipment orders as reported by Semiconductor Equipment and Materials International (SEMI).

Since the beginning of 2006, orders have run ahead of demand growth, pointing to a potential glut ahead. There is, however, one ray of hope from the July data: namely, the difference between equipment orders and end demand narrowed slightly. If this trend continues, the recent rally in semiconductors may simply reflect comfort that the trends will stabilize.

Disclosure: William Trent has a long position in SMH.

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