Electronic chemicals see slow signs of recovery

The coolness factor

01 July 2009 15:23  [Source: ICB]

After hitting rock bottom in the first quarter of this year, the electronics market is beginning to show slow signs of recovery

ELECTRONICS REMAINS a key high-value end market, driven by what some industry experts call the "coolness" factor, that is, new gadgets coming out, particularly for the mass consumer market.

"Electronics is a key high-value end-market, accounting for 5-10% of the chemical industry's revenues. It remains a high growth market," says CitiGroup analyst PJ Juvekar. "Among the different end markets for the chemical industry - autos, housing, construction, consumer spending - we think electronics will be the first one to snap back given its higher growth rate."

Trends in the electronic sector are improving, after hitting rock bottom in the first quarter. For example, semiconductor order books are still declining, but the rate has slowed. In addition, supply chain inventories are down.

"Asia is usually a leading indicator in electronics, and Japanese analysts have noted substantial improvement in that region, up to 24% month over month in March and April, for semiconductor and liquid crystal displays [LCDs] suppliers such as Hitachi Chemical and Kuraray," says Juvekar.

In general, displays are showing some positive signals, with large panel displays on the uptick since January. US producer Corning reported a 40% sequential jump in display glass in the company's first quarter earnings.

Similar trends are taking place in cellphone and personal computer inventories, Juvekar says.

"Original equipment manufacturers like [Finnish company] Nokia, [Korean company LG and [Canadian firm] Research in Motion (RIM) have cited stabilization of channel inventories on recent quarterly calls," he notes.

Meanwhile, Corning raised its 2009 growth expectations for LCD televisions to 18%, compared to its prior estimate of 9% growth.

Utilization rates are also on the rise, following a massive destocking effort, where operating rates hit a low of 60% in the first quarter, according to Juvekar.

"Panel makers cut too much production, causing a snap-back as distributors look to restock inventories. Operating rates have now moved up to [roughly] 80% in the second quarter," he says.

"We do believe that we bottomed in the first quarter of 2009, and we are anticipating growth in each quarter between now and the end of the year. The best vehicle for us is silicon demand, which is a much more valuable criteria than semiconductor sales," says Pierre Brondo, CEO of Dow Advanced Materials.

DOW ADVANCES
Dow Advanced Materials, created with the acquisition of Rohm and Hass by Dow in April, had 2008 sales of $14bn (€9.9bn).

"In this current portfolio we have five business groups, and central to this group is the electronic materials business, which had sales of over $2bn in 2008," says Brondo.

Rohm and Haas's core business in semiconductors has been the driver of solid growth and the anchor for the current growth of Dow's electronic materials business. In the semiconductor arena, Dow works with cutting-edge technology that supports the continuing shrinkage and increased power of semiconductor devices. Products include advanced photoresists, anti-reflective coatings, chemical mechanical planarization (CMP) pads and slurries and related materials.

Besides semiconductors, Dow Advanced Materials houses other business units, including interconnect technologies, display technologies and growth technologies.

"The interconnect technologies unit groups all technologies from metalization into the field of circuit board and all technologies from lithography into the field of advanced packaging," says Brondo.

This unit deals in innovations that enable high-density circuit boards and technology that increases solar cell efficiency.

The display technology unit, started in 2007, achieved approximately $300m in sales following the acquisitions of Kodak Film, SPC Film and Rohm and Haas's activities in process chemicals. The technologies being developed in this unit are to improve brightness, color saturation, viewing angle, and light management for LCD, plasma and organic light emitting diode (OLED) displays. Other products in this unit include multi-functional films, LED backlight films, optical filters and OLED materials.

The newest business unit within Dow Advanced Materials is the growth technologies unit.

"[It] is used as a business incubator to bring new technologies into our portfolio, most of these based on small technology-driven acquisition or organic growth," says Brondo.

Products developed through this unit include enabling materials used in semiconductor processing, advanced packaging and optical applications.

Sales in 2008 were $950m for the semiconductor technologies unit, $650m for interconnect technologies and $100m for growth technologies, in addition to the $300m for display technologies.

"We continue to see a shift to the Asia-Pacific region, which accounts for 67% of total company sales. In 2008, we saw our total electronic material business growing by about 12%, which was achieved mostly through the first three quarters performance," says Brondo.

"We saw a significant deceleration in the growth of the business in the fourth quarter, especially the last month and a half of the year," he adds.

However, Brondo asserts that Dow Advanced Materials remains the market leader for materials in key segments, namely CMP pads, slurries, lithography materials and metallization chemistries.

"We pride ourselves in having very strong relationships with top industry leaders, which is so critical if you want to drive a new advanced technology agenda, and technology remains our focus," says Brondo.

"We do expect to see a [market] recovery as early as the second quarter. We do see currently significant sequential growth, and we expect this sequential growth to go from quarter-to-quarter until the end of the year. We do believe that the destocking is over, so we should have a year-over-year comparison that is much more in line with the demand as has been in the past five months," Brondo says.

"We will be where we need to be by the end of the year. We also expect to have shifted all of our manufacturing from pilot plants into full manufacturing sites in Asia, most likely in Korea," he adds.

AIR PRODUCTS SEES RECOVERY
Meanwhile, chemical supplier Air Products also sees opportunities for strong growth in the electronics market. The company's electronics business was a $1.3bn business in 2008, driven heavily by technology and innovation, says Mike Hilton, senior vice president of Air Products' electronics business.

"Right now, our portfolio is 85% semiconductors, 10% thin film transistor (TFT) LCD, and about 5% emerging products that includes things like LED. We would expect that emerging piece to change pretty significantly over time, particularly in the area of photovoltaics," Hilton says.

"We have a strong capability in surface chemistry that supports our chemical-mechanical polishing (CMP) strippers and CMP slurries. We've got a very strong focus around material science and, from a company perspective, that translates into the electronics market in deposition materials and di-electrics," he says.

Over the past few years, Air Products has refocused its technology effort into three areas where the company has significant long-standing expertise and where it thinks it can have significant value as technology evolves.

These areas are depositions, cleaning/polishing and delivery systems.

"In depositions, we're really focused on both the front end of the line near the transistor and the back end of the line through the stack connecting to the real world. Our focus is around high K silicone oxide and nitrite films and metal layers, as well as low K through the stack, and then sports and double parroting types of applications to extend photolithography," Hilton says.

In the cleaning/polishing segment Air Products has strippers and related chemicals that largely support removing leftovers at the end of processing.

"We have significant sales in the chamber cleaning area for all of tools: semiconductors, flat panel display, and now PV," Hilton says.

The company has a growing business venture with DuPont on slurries with a focus on copper interbarrier layers. "We're making good progress with key leading customers in that field," says Hilton.

In the delivery systems segment, the company has systems to deliver gas, liquid, and some of the more interesting high K materials.

"We can do solid-source delivery systems, which are a challenging and innovative technology in itself - to deliver solids to the point of use," Hilton explains.

"When we look at where our customers are ultimately going to go, the products supply today has a revenue potential of over $100m in annual revenues per 1GW facility," he notes.

Air Products has not been immune to the current environment. "From a demand standpoint, we've seen over the last five to six months a disappearance of demand associated with the reduction and absolute demand in destocking," Hilton says.

"We put out some monthly statistics recently and we're down year-over-year pretty significantly, but each month from January has improved nicely. One of the areas we're not sure of is whether or not we're seeing a sustained increase in demand or how much is actually just restocking," he adds.

Air Products does see a slower recovery and improvement throughout the year, but expects that it will be years before recovery returns the market back to 2008 levels.

"As a result, we're taking the prudent short-term action that anyone would take to try and adjust cost back to what's going on with demand. But we're also doing some additional things like re-evaluating our customer base, our product base, our geographic base from the segmentation standpoint, and making sure that we have the optimal focus on geographies and products," says Hilton.

KMG STILL IN THE GAME
US-based KMG Chemicals is also seeing signs of recovery and is optimistic. "We are seeing the initial signs signaling an improvement in the semiconductor market. It is too early to determine the extent of the upturn," says John Sobchak, KMG's CFO.

"February was the trough of the market for KMG's sales to semiconductor manufacturers. We believe Asia suffered the most severe decline. However, our sales into that market are minor. Most of our sales are concentrated in the US, which seemed to suffer the least downturn. Europe is our second largest market, which declined significantly more than the US," Sobchak adds.

KMG is heavily concentrated in sales to the semiconductor market and is also expanding sales into the photovoltaic market

"We expect continued long-term growth in the market, although perhaps at a slower rate. As segments of the electronic materials market enter their maturity phase, we anticipate that there will be a consolidation of suppliers servicing those segments as the larger players exit in search of higher growth opportunities elsewhere," says Sobchak.

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By: Feliza Mirasol
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