July 25, 2019 / 5:22 AM / 4 months ago

Breakingviews - Japan-Korea spat returns chip price error message

A SK Hynix plant is seen in Icheon, about 80 km (50 miles) southeast of Seoul, January 30, 2013. South Korean chipmaker SK Hynix returned to a quarterly profit on Wednesday on demand from mobile device makers such as Apple Inc, but it fell far short of forecasts on weak sales of computer chips and a strong won. REUTERS/Lee Jae-Won

HONG KONG (Reuters Breakingviews) - A Japan-Korea trade dispute is muddling the memory chip sector’s outlook. Quarterly earnings at the $48 billion SK Hynix plunged 88% from a year earlier. Yet its shares rose on hopes that Tokyo’s recent technology export curbs on South Korea will depress supply and lift prices. The risks of weaker demand and supply chain ruptures suggest any rally has weak legs.

    On Thursday, the world’s second largest memory-chip maker said earnings in the three months to June slumped to 537 billion won ($455 million), missing the average analyst forecast from Refinitiv by some 15%. Average selling prices for SK Hynix’s memory chips, which are used in smartphones, servers and other devices, fell by a quarter compared to a year earlier, as demand badly undershot the company’s expectations.

    However, shares of the Seoul-listed chipmaker promptly rose as much as 3% on the news. Even before this rally, investors have added roughly $4 billion to SK Hynix’s market capitalisation since the start of the month, when Tokyo tightened curbs on local exports of three vital semiconductor-making materials to South Korea – ostensibly in response to Seoul’s Supreme Court rulings to order some Japanese companies to compensate forced wartime labourers. Shareholders are now betting that a looming shortage would prop up prices. Indeed, executives at SK Hynix said the company would cut investment and production.

   True, Japanese suppliers accounted for 70% to 90% of global production of the materials in question; spot prices for so-called DRAM chips spiked in the week following Tokyo’s decision to erect trade barriers. Even so, just a fraction of buying is done on the spot markets, so it’s not clear what the impact on fixed prices will ultimately be. Industry tracker TrendForce estimates chipmakers are still sitting on over three months’ worth of inventories, which will continue to squeeze prices.     

    More generally, demand still looks tepid. Handset shipments are on track to shrink again this year, while improvements in the PC and data-centre markets also look muted. Absent a quick resolution between Japan and South Korea, sourcing alternative supplies outside of Japan could be costly and highly disruptive for the likes of SK Hynix and rival Samsung Electronics too. Investor optimism seems misplaced.

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