Semiconductor growth to slow substantially in 2005, analysts say

El Segundo (CA) - A new report released by iSuppli dampens the hope for another golden year for the global semiconductor industry. Analysts believe that high energy prices, excess manufacturing capacity as well as damages caused by Hurricane Katrina will have a negative impact on 2005 chip sales.

While the semiconductor industry itself still believes in solid growth for this year, iSuppli is one of the first market research firms to cut its revenue forecast for this year. Compared to chip sales of $227.2 billion in 2004, iSuppli now expects global revenues to gain only 2.4 percent and end up at $232.7 billion.

iSuppli analysts originally forecasted 5.9 percent growth, but now believe that the rapid rise in global energy prices, combined with a growing excess of manufacturing capacity will have a negative impact on the industry.

"In a troubling sign for the semiconductor industry, chip suppliers are continuing to increase production-despite slowing growth and weakening prices," the firm said in a statement. "Global semiconductor capacity is expected to rise by 3.1 percent in the third quarter compared to the second. Meanwhile, worldwide semiconductor manufacturing capacity utilization will increase to 86 percent in the third quarter, up from 83 percent in the second."

"With the significant amount of capacity that is available, if end demand does not significantly increase, the fourth quarter will experience a slowdown in manufacturing run rates," said Len Jelinek, director and principal analyst, semiconductor manufacturing, at iSuppli. "The severity and length of this slowdown will be determined by the amount of semiconductor inventory built up in the third quarter."

Hurricane Katrina may also take its toll on the industry: According to the market research firm, the storm forced the shutdown of Air Products and Chemicals, Inc. in New Orleans, one of the major suppliers of hydrogen used in the deposition of epitaxial films on silicon wafers. While the extent of the damage remains unknown at this time and Air Products indicated it will be working to restore operations quickly, as a result, the company declared it will be unable to fulfill its near-term obligations for delivery of liquid hydrogen.

The supply disruption may affect the manufacturing of epitaxial films deposited on silicon substrates - which are essential in the manufacturing of higher-voltage semiconductors used in power management applications, iSuppli said.

Although short-term revenue forecasts for the semiconductor industry have been trimmed, sales are expected to pick up in 2006 - with growth of 4.3 percent. Double-digit gains are predicted for 2007, 2008 and 2009. According to iSuppli, 2009 will be the first year in which semiconductor manufacturers will break the $300 billion mark and reach more than $328 billion in sales.