Converge Reports Shortages and Savings Continue to Drive CPU Market

Editor's note: The content in this "Market Insights" electronics supply chain report is provided by Converge, a global supply chain partner for technology-driven companies. The Converge Market Intelligence team, made up of commodity managers and data analysts located around the globe, monitors and analyzes the daily pricing and supply and demand of high-tech commodities. It provided the following market insights.


Memory update
The memory market, specifically for modules, has been showing some signs of weakening over the past four weeks. Although activity in the spot market for DDR2 and DDR3 modules has been relatively light since late February, pricing has remained stable. However, as a result of the lack of spot market procurement, prices for 2-GB DDR2 and DDR3 modules are showing signs of coming down. Another factor that Converge believes has added to the pricing instability was the unexpected announcement that the contract price for 2H [second half] April had settled at stable to slightly down. As Tier 1 box builders weigh the option of reducing memory content for upcoming shipments in consumer desktop and notebooks, supply seems to be catching up.

Judging by the tone of numerous memory vendors, we could see the spot market price continue to slide a little over the next three weeks as we approach the long holiday weekend in the United States. Converge believes that any further drop for DDR2 and DDR3 memory will be minimal. Pricing is expected to stabilize and possibly rebound by the beginning of June as the industry begins to prepare for the build season.

CPU update
In April the market was active, as shortages and savings were in abundance across the range of processor families. This positive bounce, which was unanticipated, bucked the trend set in Q1 with sluggish demand across the main mobile and desktop markets.

In particular we saw the full force of the Intel Arrandale shortage, with the I-330M, I3-350M and I5-430M all suffering from depleted stock as OEMs moved from the Intel Montevina platform. This resulted in parts changing hands at inflated pricing during April. We expect the I3-330M to settle in the $100 to $110 range, but spot market prices of around $130 have not been uncommon.

Currently, we are seeing a swath of excess inventory in the market as the Nehalem, Wolfdale, and Montevina families go end of life. The T7700s, T8100s, and P7350s are among the CPUs selling below their direct pricing in the spot market. Server chips continue to deliver savings, particularly in the 45-nm Nehalem and Dunnington families. In some instances, double-digit margin savings can be attained, making this an opportune time to gain a price advantage as we cross between new and old architectures.

Semiconductors and ICs update
Lead times on most of the shortage items Converge has been tracking over the past six to eight months have remained steady. There are some products, most notably the TI TPS data converters and MSP430 series microcontrollers, that are seeing some easing in lead times, although it's too early to tell if this is temporary due to a slight dip in overall demand during the past several weeks. Lead times continue to be long, however, in their DSPs, as some products are out to 28 weeks with open market prices climbing to record highs. Optoelectronic lead times remain steady in the 16-to-24-week range. Some families of ON Semi diodes are still tight, while others have loosened slightly. Microsemi diodes are still the kings of stretched lead times, with some pushing out more than 50 weeks. AMCC has joined Atmel, Infineon, Freescale, and TI with some microcontroller lead times out more than 20 weeks.

Many of the spot shortages we have been tracking have been resolved by product "trade off" in the manufacturing process, allowing for delivery on some products while forcing others to go short. Chip manufacturers are still not sold on the strength of any global recovery and as a result continue to hold back on increasing capacity. Instead they are opting to make the best of what they have currently available. This is causing the easing of lead times of specific chips within a product type, while allowing for deliveries of others within that same product type to lengthen. In other words, shortening the lead times of a part that has been a problem at the expense of another.

All in all, barring an unforeseen downturn in the economy, we expect more of the same market conditions we've been watching for the past six to eight months to continue through the summer build season.

Storage update
Higher-capacity 3.5-inch desktop SATA HDD pricing continues to drop. In our last Market Insights we reported a price drop in the 1.5-TB and 2-TB capacities. Now these price declines are occurring in the 750-GB and 1-TB drives, as well. The 750-GB models are selling in the high $40 to low $50 range, and 1-TB drives can be purchased in the low to mid $60 range. Meanwhile, the 1.5 TB has dropped to the high $80 range, and 2 TB can be found at around $120. Converge believes this is due not only to the seasonal slowdown in the HDD market but also to reports that a 3-TB model will be introduced in the market later this year. Additionally, analysts are reporting that the big PC builders are pressuring the major HDD manufacturers for improved pricing after seeing HDD margins soar in 2009 while experiencing slim margins themselves. As a result, we expect the pace of this erosion to continue through May and into June. While price is eroding in the higher-capacity 3.5-inch desktop SATA HDD, this has had little effect month over month on the lower capacities, with prices off by only $1 to $2 on 80 GB through 500 GB drives.

Activity in the enterprise market is heating up, with the SATA interface emerging as the preferred interface. The higher-capacity ranges coupled with lower costs have significantly displaced the SCSI and Fibre Channel HDDs. Manufacturers continue to push development of larger-capacity, faster and quieter offerings in the SATA interface. In April's Market Insights report, we noted the release of Western Digital's newest addition to the Velociraptor line - a 600-GB, 10K RPM, 32-MB, 2.5-inch SATA HDD. As previously mentioned, Seagate is believed to be releasing a 3-TB 3.5-inch HDD later this year, to be followed by a 1-TB 2.5-inch model. However, the SAS drives are slowly gaining favor in this space. They can't compete dollar for dollar on cost per drive with SATA. However, the available speeds per capacity, as well as reliability, are justifying price for some and thus gaining favor and market share.

Finally, the IDE shortage continues. This is most evident in the 2.5-inch FF, resulting in soaring open market prices. This was reported last month and remains unchanged. Prices are up $5 to $7 per capacity. The 40-GB, 60-GB and 80-GB 5400 RPM models are selling for approximately $27, $30, and $36, respectively. With demand unlikely to change any time soon, we expect pricing to remain elevated for several months.

LCD update
The LCD market has been reasonably stable as we move deeper into the second quarter of 2010. Seasonal factors are a primary contributor to the recent downward slope of demand, following the holiday-crowded first quarter. A number of factories are not quoting firm pricing in May on TV panels that are 40-inch and larger. Instead, clients with forecasts are advised to negotiate contract pricing on a case-by-case basis. Pricing on sizes of 26-nch through 37-inch remains stable, with fluctuations in single-digit amounts. A high level of inventory in the distribution channel is another reason dictating the current market conditions. Overall, TV panels yield higher profits in comparison with notebook and desktop panels. As we approach the third quarter, when OEMs finalize their forecasts to meet the year-end demand, panel makers will be juggling to expand production capacities for TV panels at the expense of other product lines. Panel shortages and pricing instabilities may very well be in store in the near future.

The first product segment to feel the effect of shifting production capacities is notebook panels. Although not officially announcing the fact, factories are surely and quietly realigning their production lines to maximize profits in the third quarter. Given the ongoing material shortage and that Foxconn will be consuming a considerable portion of the Chimei-Innolux output, a shortage on notebook panels appears imminent. If such speculations become the consensus of the market, Converge expects to see upward pricing pressure in the open market in anticipation of the panel shortage as early as the second half of May. An estimated 3% to 5% price increase between June and July does not seem out of place at this point. The shortage will potentially spill over from the mainstream 15.6-inch and 17.3-inch to all other sizes. Meanwhile, the strong demand from the service industry for 14.1-inch with WXGA resolutions and CCFL backlight will likely stay center stage throughout most of the quarter, particularly for panels made by AUO and LG Philips.

The market for desktop panels is fluctuating modestly in May, with factory pricing largely unchanged for most sizes. Average lead time quoted by the factories is still in the four-to-six-week range. Little change took place in demand from April to May - although factory output volume as well as pricing may be due for adjustment amid the upcoming realignment of production lines. Like for panels for other applications, industrial panel supplies are also expected to be tighter as we approach the end of the quarter. For the month of May, Converge sees increased booking in preparation for the upcoming shortages. Despite a relatively quiet April and May, the LCD market seems to be staging itself for a busy third quarter. Stay tuned.


Converge note: Prices listed for products in this report are based upon market conditions at the time the articles are written (May 12). Prices quoted in these articles should be used only as a guide, as market conditions vary daily and can affect overall spot market pricing.

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