Samsung likely to narrow chip losses in Q3 due to production cuts

Samsung Electronics is expected to reduce its chip deficit in the third quarter, thanks largely to a continued cut in its chip output, according to analysts. Samsung, the world's largest memory chip maker, slashed its chip production early this year, belatedly joining its peers, like SK hynix Inc. and Micron Technology Inc., which started to cut production late last year, to resolve a persistent supply glut. Analyst Kim Dong-won at KB Securities forecast Samsung's Device Solutions (DS) division, which oversees its cash cow chip business, to make losses of around 4 trillion won ($2.96 billion) in the third quarter, lower than the 4.35 trillion won of the second quarter, reports Yonhap news agency. He said Samsung has raised its production cut since the second half to 30 per cent for DRAM and 40 per cent for NAND Flash, from 20 per cent and 30 per cent, respectively, in the first half.

Samsung's DS division logged an operating loss of 4.6 trillion won in the first quarter, its first financial loss in 14 years, as chip inventories grew significantly amid tapering global demand. Prior to that, the division recorded losses in the first quarter of 2009. While the production cut and more balanced supply and demand dynamics have started to boost memory chip prices, elevated fixed prices to cope with manufacturing facilities sitting idle also weighed on profits, Choi Bo-young, an analyst at Kyobo Securities, said.

Analyst Kim Kwang-jin from Hanwha Investment & Securities forecasted Samsung's chip performance to come short of market expectations, as the company seemed to take more time to fully recover its chip business than previously expected. Kim estimated the DS division's loss at 3.7 trillion won in the third quarter.

Greg Roh, head of research at Hyundai Motor Securities, said Samsung's production cut has had "minimal" impact so far, and a rise in depreciation costs arising from the ramp-up of a new chip production line in its Pyeongtaek Campus has eaten away profits. He estimated the DS division's loss similarly at 3.6 trillion won. Market tracker TrendForce said Samsung moved farther than previously expected to tackle the oversupply issue.  Samsung took "a decisive step" to make a 50 per cent production cut for NAND Flash to deal with persistent softening in demand, which is likely to help stabilise chip prices and boost demand in the coming months, TrendForce said earlier this month.

"Samsung's aggressive production cuts are likely to set off a ripple effect: a potential price uplift for their primary products," it added. "This ripple is anticipated to propel the overall bit shipment volume of NAND Flash in Q4, gradually narrowing the deficit gap for suppliers. Simultaneously, this shift will likely improve the profit outlook for module makers."