Research firm sounds alarm on chip inventories

Global semiconductor inventories have surged to the highest level in two-and-a-half-years to just about where they were before the onset of the last chip downturn, market researcher IHS iSuppli warned on Wednesday.

The high inventories will become a big concern if chip sales growth slows down.

"If growth is lower, the high inventories could cause oversupply in the market, causing chip prices to decline faster than normal," wrote Sharon Stiefel, chip analyst at IHS iSuppli, in the report. "This could amplify the size and duration of a downturn or slowdown in the semiconductor market," she said.

Chip downturns and the resulting declines in chip prices hurt companies but are good for consumers, since chips are often the most expensive part of a gadget.

IHS iSuppli, which tracks global chip inventories as a way to determine when the boom-bust cycle of the industry is reaching its peaks and valleys, said in a report that chip suppliers held 83.6 days of inventory at the end of last year, the highest level since the second quarter of 2008, when inventories hit 84 days and marked a peak before the market fell. In general, the chip industry peaks when inventory days rise above 80 and bottoms when inventory days drop below 70, according to IHS iSuppli figures.

"Inventory levels arguably now are high by any standard," Stiefel wrote. "The sharp increase of semiconductor inventory during the fourth quarter defied expectations of a decline for the period."

IHS iSuppli predicts chip industry revenue will grow 5.6 percent this year. Last year, chip revenue grew a whopping 31.8 percent as companies rebuilt inventories decimated by global economic turbulence in 2009 and as consumers snapped up more smartphones, tablets and other gadgets.

The global chip industry has been plagued by a regular boom-bust cycle caused in part by the massive investment needed for new chip factories. State-of-the-art chip factories cost billions of dollars, and most companies invest in new factories at the same time. Often those plants come online around the same time, resulting in a glut of new supply.

But since companies have borrowed so much money to build the new factories, they cannot simply mothball production lines and wait for the glut to ease. They have to sell as many chips as possible to keep cash coming in so they can repay the loans.

A glut of DRAM sent prices of the important memory chips spiralling last year. DRAMeXchange, which runs an online clearinghouse for the chips, believes DRAM prices finally bottomed in early February after posting a 50 percent decline in the fourth quarter.

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