[ANALYSIS] Omicron fears spell early end to doldrums in chip industry

A Nov. 30 aerial photo in Gurnee, Illinois, shows pre-owned vehicles in parking spots usually occupied by new vehicles, left, near a lot for new vehicles which is sitting nearly empty, as new vehicle production levels remain low worldwide. EPA-Yonhap

By Kim Yoo-chul

A top-tier investment bank released a report in August, intriguingly titled "Winter Is Coming," warning of challenging pricing conditions through next year.

Specifically, several Morgan Stanley analysts asserted that the global semiconductor industry was entering the last phase of a super cycle, where supply for memory chips surpasses demand. Its assessment had prompted major investors to immediately unload their holdings in top memory chipmakers including Samsung, SK and Micron Technology, as the report noted that an extended price increase would begin to reverse next year.

Unsurprisingly, the world's top three memory chipmakers played down the significance of Morgan Stanley's view, claiming their inventory volumes stood at manageable levels. Therefore, the impact of the continued COVID-19 situation could be limited.

In reality, the global memory chip market is not looking good, as a continued semiconductor shortage has been stunting sales of consumer electronic goods and vehicles. But ironically, the spread of the Omicron variant of COVID-19 is emerging as a savior for the entire industry, according to analysts, Monday.

The reasoning is that the price fall of contract-based chips was not as severe as expected. Contract-based chips are manufactured by semiconductor makers for other companies.

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"No announcement of factory shutdowns has been made. But a growing number of key markets are considering applying lockdowns because of the spread of Omicron. This will prompt consumers to return to working from home, a plus factor in terms of demand for memory chips," said Song Jae-kyung, head of research at Heungkuk Securities.

Omicron is feared to be more contagious than the Delta variant of COVID-19, according to some scientists.

A tugboat is docked near a container ship at the Port of Los Angeles, Nov. 30, in San Pedro, California. AFP-Yonhap

As chances are high that the Omicron variant will explode into a possible fifth wave of infections in developed countries, top-tier tech companies ― Microsoft, Google, Amazon and Tesla ― are on track to purchase more chips from suppliers ahead of additional price hikes.

"Yes, some big buyers, who have previously held off on their purchases of memory chips based on assumptions that chip prices will fall further, are busy buying memory chips, which I believe is a good factor in terms of clearing inventories at chip suppliers," a senior executive at one of the top three global memory chipmakers told The Korea Times by telephone.

Samsung Electronics, the world's top memory chipmaker, said it was responding to potential chip price declines by maintaining a flexible chip supply.

Morgan Stanley said in another report recently that it expects to see a shortened downcycle next year because of solid demand for cloud computing applications and tight inventory levels at suppliers.

"Bottlenecks in global semiconductor supply are seeing signs of improvement and honestly, it will be truly better thanks to enhanced extended-range predictability from the lessons of the early stages of the COVID-19 pandemic," said Kim Dong-won, an analyst at KB Securities. "Demand for corporate PC services will hugely rise next year with the supply chain bottlenecks eased. Plus, the so-called Omicron factor will have a positive impact on the demand side."

Last month, foreign investors purchased 1.29 trillion won worth of Samsung Electronics shares, followed by 1.01 trillion won in SK hynix stocks, according to data provided by the Korea Exchange (KRX), Korea's top bourse operator.

"Amid growing concerns over the Omicron variant of COVID-19, foreign investors are set to purchase more chip stocks and I would say this predictability will play a role in reducing the volatility of the entire stock market. After checking soon-to-be-released views by the U.S. Federal Reserve regarding the timing of its bond purchase, foreign investors are set to extend their purchases of major chip stocks," said Yoon Chang-yong, head of research at Shinhan Financial Investment.

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