Watch The Wafers----The Global Semi-Conductor Demand Has Collapsed

By Andrew Zatlin at Moneyball Economics

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Silicon Wafers and What They Tell Us

Collapsing demand for silicon wafers is signaling further global economic slowdown.

Silicon wafers are the raw material used for semiconductors. It’s the pig iron that gets turned into steel, the concrete that becomes roads. Except that semiconductors have a far broader and deeper reach in the 21st century economy. That is, demand for silicon is a pure reflection of economic demand, but just slightly in the near future since that silicon has to be turned into semiconductors first and then integrated into things to then get sold.

Simply put, in a growing economy where production and durable goods demand is expanding, silicon wafer demand is growing.

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As the chart shows, unit growth has collapsed to 0% year over year.

Demand for semiconductors has stopped growing.  If we were talking about automobiles and I said that car tire sales have stopped growing, you would immediately say, “Then that means car sales have stopped growing.” In this case, I’m saying that silicon wafer sales are a proxy for the entire global economy, and it has stopped growing, and conditions are worsening.

The wafer market is very concentrated: 97% of wafers are made by just five companies, dominated by Japan. Shin Etsu and SUMCO deliver 60% of the world’s demand for silicon.

The latest Japanese data from the Ministry of Economy, Trade and Industry shows that Japan’s silicon wafer production in October contracted -6% y/y, and that’s in unit terms. The implication is that 4Q will see wafer sales go from no growth to outright contraction.

The Big Picture

Collapsing silicon wafer growth comes against a background of rising smartphone sales (and by default growing silicon demand). Either smartphone sales are weaker than expected, or non-smartphone demand has crashed… or some of both.

For Asia, this is terrible news.

Taiwan, Korea, and China depend on semiconductor and high tech exports.

Almost 100% of China’s marginal export growth is coming from smartphone exports.

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Information technology exports are the backbone of Korea’s exports, and that simply speaks to semiconductors in boxes.

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Taiwan lives or dies according to smartphone and related exports.

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Best case scenario: Smartphone sales are rapidly slowing down, reducing overall silicon demand. That’s roughly a 5% contraction in sales. Perhaps this explains Apple’s (AAPL) recent desperate promotions (telecom promotions of buy one iPhone, get one free, as well as $100 discounts for an iWatch).

Worst case scenario: Demand slowdown cuts across all factory goods. In which case, the global economy is slowing faster.

In the best case scenario, Taiwan and Korea are the most exposed. In the worst case scenario, China is equally exposed.

Implications for US GDP

We can look at this in several ways.

First, if Taiwan, Korea, and China aren’t selling more stuff, it’s largely because the US isn’t buying more stuff. So a drop in the wafer business is reflecting a drop in the US economy.

The reverse is also true: if they aren’t selling, then people aren’t buying. US exports will fall $100B this year. Another revealing metric is the volume of containers leaving US ports empty relative to the number that came in full (outbound containers to inbound). It answers the question: after dropping off their cargo (inbound), are Chinese ships returning with US products or are they just going back empty? The Port of Long Beach is the primary route for US/China trade. The ratio of empty containers to inbound containers is at a cyclical high.

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Notice that, like the wafer growth, it all started in 4Q 2014.

The bottom line is that silicon wafer shipments directly reflect the US GDP.

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(Note the correlation diverged a bit in 2012 when the US oil boom pushed up the GDP and didn’t lead to an increase in semiconductors, but you get the idea.)

The silicon wafers are testifying to a drop in US exports and a drop in domestic demand, both of which hit the GDP. Historically, sharp drops in wafer shipments coincide with sluggish GDP growth.

Current indications are that 4Q silicon wafer production will be negative, implying that 4Q US GDP will be 0.5%-1%. That’s a lot lower than current expectations.

What to Do

You really need to consider getting defensive with the stock market. Cash (money markets) is one place to go. Buying long term puts is another.

Shorting AAPL may be worth considering. If smartphone sales are slowing, Apple is in trouble.

Source: Semiconductors: Global Economic Growth Continues to Decelerate - Moneyball Economics

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