Sourceability Insights: November 2024 Market Update
The semiconductor supply chain has been through a lot these past few weeks. From severe weather in Southeast Asia and the United States flooding roads to the International Longshoremen Association’s (ILA) strike closing ports, the industry has battled disaster after disaster. While many of these challenges weren’t as severe as previously expected, there are a few more problems for the industry to overcome this year.
The holiday season will not be the saving grace many organizations hoped for. Excess electronic component inventory is still around, keeping procurement teams from committing to buy ahead and scheduled orders. Many organizations fill backlogs with existing surplus, keeping demand flat and average selling prices low. A few analysts predict that these difficulties will persist into 1Q25 before stabilization can fully occur.
However, geopolitical volatility, natural disasters, or labor incidents could significantly disrupt these ongoing efforts, pushing stabilization further out.
Logistics Backlogs from Stikes, Crises, and Weather
The global logistics industry is faring better than expected after weeks of continuous impacts that threatened to derail the worldwide supply chain for everything from electronic components to fruit.
Throughout all of 2024, shipping worldwide has been battling with the spillover of the Israel-Hamas conflict. The Red Sea Crisis has scared off many shipping companies from utilizing two significant waterways, the Suez Canal and the Bab el-Mandeb Strait. Companies have been forced to choose between traveling through the Suez, risking attacks on transport ships and paying increased insurance, or going around Cape Good Hope in South Africa, adding days-long delays, increasing fuel costs, and impacting manufacturing just-in-time (JIT) schedules.
Because the Suez Canal accounts for 15% of all global maritime trade volumes, noticeable delays have impacted shipments from Asian ports bound for Western Europe or East Coast U.S. ports. Transit times have increased 55%, averaging 11 to 12 days, depending on the port.
This has been the norm for most of the year. However, severe weather in Southeast Asia and eastern U.S. states has recently exacerbated this ongoing challenge. Typhoons Gaemi and Yagi and hurricanes Helene and Milton have significantly impacted ports, railways, and roads with extreme flooding, high winds, or both.
This has contributed to port congestion and delays as towns and communities within the affected areas focus on clearing roads for relief transport rather than shipping materials. The dire situation could have been exacerbated in the United States had the ILA’s strike, which occurred in early October, persisted for more than three days.
The ILA strike had the opportunity to cause extreme shortages across the United States in everything from components to coffee. It would have taken 4 to 6 weeks to resolve if it had gone on for even a week. The three-day strike cost the U.S. economy $5 billion a day and ended up queuing 54 ships outside East and Gulf Coast harbors.
While the strike ended early, pricing platform Xeneta said, “It was likely to take two to three weeks for the normal flow of goods to be re-established.”
Chief Analyst Peter Sand from Xeneta told Reuters, “Remember that ships keep calling, so it's not just a matter of handling the ships already in line but of working extra hard to reduce the congestion before supply chains are re-running.”
The impact on the semiconductor industry will be short, as many customers are still not ordering new inventory, just filling backlogs with the pre-existing surplus. The industry is looking at a turnaround by 1Q25, however the ILA strike isn’t completely resolved. Their negotiations regarding automation have only been tabled until January. Should talks break down, another strike may occur at the dawn of the Lunar New Year, another peak shipping season. This again would put the semiconductor industry’s struggle toward recovery in the crossfire.
"The decision to end the current strike and allow the East and Gulf coast ports to reopen is good news for the nation’s economy," the National Retail Federation said in a statement. "The sooner they reach a (final) deal, the better for all American families."
Spruce Pine Assesses Damage
Nestled in the mountains of North Carolina, Spruce Pine is a small community that provides crucial support for the global semiconductor industry. Spruce Pine is the world’s largest source of highly pure quartz, essential for fabricating silicon wafers. Without it, there would be long-term effects on the global semiconductor industry.
In 2008, a fire at the quartz refinery greatly impacted the market. Without a viable alternative source, any significant disruption to Spruce Pine’s operations could cause massive problems for dozens of markets.
Johannes Brenreuter, head of Brenreuter Research, told NPR, “If a disruption went on for more than a few weeks, it would pose a serious problem for the production of silicon.”
When Helene landed, Spruce Pine fell within the hurricane’s devastating path. According to the National Weather Service, the town received 24.12 inches of rain, flooding downtown by up to 10 feet, destroying roads and damaging rail lines. Power, water, and cellular service were all down, with fallen trees and washed-out roads isolating the community from aid and the outside world.
According to NPR, Spencer Bost, Executive Director of Downtown Spruce Pine, said it took 3 days before “we got enough chainsaws together to cut a path out of our neighborhood.”
The world collectively held its breath as it waited for news from the two companies that own mining facilities in Spruce Pine: Quartz Corp. and Sibelco. In the days after Helene, each company made statements that the damage was unknown as they were prioritizing the safety and welfare of their employees. Later, after their staff was taken care of, assessments began. The news was good.
Sibelco and the Quartz Corp. reported minimal facility damage and recommenced operations in late October after ensuring relief was provided to their local workers.
However, the damage to the roads and the railways proves a much bigger problem. It could take days to months to repair transport out of the area. NPR reported that the main CSX rail line that acts as the primary shipping point for quartz out of the mine has been heavily damaged. Without it, facilities will operate with downgraded efficiency, which could mean long-term fallout.
Lita Shon-Roy, President and CEO of market research firm TECHCET, told NPR, “It's amazing that the industry hasn’t been more concerned about the vulnerability created from relying on this one region of North Carolina for this crucial material.”
Shon-Roy continued, “Every time I’ve asked in the last two decades, the question always comes back. Well, where else are we supposed to get it? I haven’t heard of any viable sources yet to replace what’s in North Carolina.”
DRAM and NAND Markets Will See Price Stabilization Arrive in 1Q25
The memory market has seen its fair share of highs and lows this last year. DRAM and NAND flash products used in AI, such as high-bandwidth memory (HBM) and enterprise solid-state drives (SSDs), have been flying off the shelves. Meanwhile, general DRAM and NAND flash parts have seen flat demand all year.
Excess inventory and consumer wariness have kept average selling prices (ASPs) low. Despite suppliers' efforts to engage in strict production cuts to limit the excess electronic component inventory, the surplus is still an issue for many companies. This has contributed to organizations using their excess to fill backlogs rather than procuring new stock or engaging in buy-ahead ordering.
TrendForce indicates that the spot price of DRAM and NAND flash is unlikely to rise by the end of the year. This forecast is due to slow orders during peak shopping seasons, such as China’s National Day Golden Week and back-to-school in the United States and Europe.
TrendForce research revealed that “some module houses are keen to lower their inventory levels, thus pushing spot prices to go down further. The supply-demand dynamics of the spot market remains unchanged, and a rebound is unlikely before the year’s end.”
Likewise, the spot market for NAND flash “was sluggish in transactions as buyers had not raised their willingness to stock amidst the National Day holiday in China. Several suppliers are selling their products at lower unit prices this week as sales pressure continues to envelop their entire market, which has yet to alleviate the overall status.”
Some module houses are planning another wave of inventory reductions due to continuing sales pressure and market price declines. Given the overall state of the semiconductor industry, these low prices are expected to continue into 1H25.
ASML recently warned of a “slower recovery in the semiconductor market,” cutting its outlook for 2025 due to orders falling short of the previous forecast in Q3. Christopher Fouquet, ASML’s Chief Executive Officer, said customer cautiousness is triggering a more gradual recovery in all areas outside AI. Challenges impacting Samsung and Intel have likely contributed to ASML’s results.
ASML’s Finance Chief Roger Dassen said, “Very specific competitive issues in the foundry business had contributed to a slower recovery in those chip markets that were not benefiting from booming demand for AI computing infrastructure.”
Dassen also said, “ASML expected its sales to China to fall next year, from almost half of revenues in the third quarter to around 20%.”
It should be noted that ASML’s forecast could be due to recent sales restrictions to China, which made up a significant amount of the company’s global sales last year. That said, the semiconductor industry’s recovery is more likely to occur over 1H25 than in late Q4. This is not true for AI, which could soon encounter another prolific shortage if demand surpasses capacity.
Incoming AI Shortage Possible Reports Bain & Company
Industry analysts forecast that artificial intelligence, the ongoing dominant technology across most market sectors, will be in high demand over the next several years. TSMC has seen the most success, alongside designer and GPU king Nvidia, due to the ongoing popularity for AI-enabled applications and components. However, the lack of competition and the ongoing geopolitical challenges may contribute to an oncoming shortage.
In a recent report by Bain & Company, Anne Hoecker, the Head of Bain Americas technology practice, warned that the high demand for GPUs and other AI-capable components used in AI devices could lead to a troublesome shortage.
Artificial intelligence has been the reigning king of technology for nearly two years. AI-enabled smartphones and laptops are now making their debut, with analysts predicting they will quickly become a little under half of all market orders in just a few years. Due to AI’s popularity, demand for semiconductors has been growing, putting the industry at risk of another shortage.
“The increasing demand for GPUs has caused shortages in some segments of the semiconductor supply chain.” Hoecker points out that if demand continues to grow, “the onslaught of AI-enabled devices may accelerate PC refresh cycles and pose extreme widespread supply constraints for semiconductors.”
Bain & Company’s research reveals that if demand exceeds 20% in the coming year, it could exacerbate current chokeholds, causing a component shortage. This risk is further heightened by the ongoing geopolitical tensions worldwide, especially the China-U.S. trade war. Rising tensions in the trade war could lead to more export restrictions on critical raw materials used in the fabrication of advanced semiconductors.
Likewise, factory delays due to labor shortages limit production capacity. Suppose demand exceeds existing production capacity without the labor or facilities to support an expansion. In that case, a shortage will exist until production capacity expands or market demand falls.
Bain & Company states the “supply and demand of semiconductors is a delicate balance, as the industry and its customers know all too well after the past few years. Although the pandemic-induced chip shortage has passed, executives are starting to prepare for the next potential crunch caused by (you guessed it) artificial intelligence.”
Scott Bickley, research practice lead at Info-Tech Research Group, agrees, “The advanced semiconductor supply chain is the most fragile on the planet. Over 5,000 vendors must work in perfect harmony to produce the most advanced chips.”
Many of these vendors, he said, “supply a single component to a single company, without which the whole system comes screeching to a halt. The technical obstacles alone are mind-boggling, notwithstanding the geopolitical risks facing TSMC and the normal headwinds of logistics management.”
The Bain & Company report revealed that spending on data centers and the components to support them is expected to increase year-on-year by 36% in 2024 due to AI and accelerated computing. Should data center demand for current-generation GPUs double by 2026, suppliers must increase output by 30% or more.
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