By David Hsieh, Vice President, Greater China Market

As they have for the last six months, panel prices continue to fall. Most notebook, monitor and TV panel prices are less than half of their levels six months ago. Panel makers are cutting capacity utilization, closing some fabs, and selling below cost; some are selling below their variable cost or even under materials cost.

However, there are some signs of change:

• Many set makers are indicating that some panel manufacturers may “walk away” from business in 2009 if lower pricing is requested. These panel makers want to stop the bleeding so badly that they are willing to pass up orders.
• Many panel makers continue to offer low prices on monitor panels in December just to meet their end-of-year quotas. Things may change in January, however; even though they are operating at low utilization rates and the oversupply situation will continue, some panel makers are beginning to “hold the line” on pricing since they are already selling below cash cost.
• Some panel companies are starting to take the BTTO approach; instead of BTO (build to order), they build to tolerable order.
• Set makers do not want to see panel prices in freefall either. Unhealthy panel makers are dangerous for long-term and stable LCD panel supply for these buyers. They cannot let panel makers die, or have just one or two panel makers survive. Meanwhile, the risk in rapidly falling prices is that set makers are exposed to inventory depreciation loss. “Maybe we should start to consider how to help panel prices go back at least to the cash cost level to help these panel makers keep going. It’s good for everybody,” one procurement executive from a brand told me.

The supply-demand scenarios lead to the conclusion that there will be continued drops in panel pricing in Q1’09 and Q2’09, but due to the lack of demand elasticity, panel makers may reduce supply further. “Even if some demand comes back gradually, I cannot easily raise my capacity utilization or call back the workers that are on unpaid leave. I will still hold the line on pricing for a certain period. I will reject the orders that I think are unreasonable. I cannot bleed anymore,” one sales executive from a TFT LCD company told me.

So, is it possible that we will see a small panel price bump in the first half of 2009? With supply being scaled back, is the inventory in the supply chain digested enough to make this happen? Possibly.

Of course, any increase would not be a big upward correction and not last long, perhaps one or two months, because the market fundamentals need to improve. But you can start to see signs that producers are changing their behavior. According to past experience, when they finally start passing up business, something will change.

Another challenge is that Q1’09 demand will be lower than Q4’08. We are seeing double-digit declines in various applications. So capacity utilizations might need to fall further in order to enable a price bump; we do hear from panel makers that they plan to reduce utilization sharply again in Q1’09.