HONG KONG (Reuters Breakingviews) - Japan is short-circuiting hopes of a price rebound for memory chips. Shares in $260 billion Samsung Electronics slid after the company warned of poor visibility into the impact of Tokyo’s export curbs on Seoul. An escalating trade dispute between the two neighbours threatens semiconductor supply chains. It’s now also throwing into doubt confidence in a better end to 2019.
After publishing an expected drop in June-quarter earnings, the world’s top memory-chip maker gave investors more bad news, confirming fears that a trade dispute between Japan and South Korea makes the future harder to predict for an already battered industry. Earlier this month, Tokyo restricted shipments of vital semiconductor and display panel-making materials, initially as part of a protracted labour spat between the two sides that dates back to World War Two. The row is escalating, and Samsung executives on Wednesday said the company was “facing difficulties” as a result of Japan’s new export rules. Combined with the larger U.S.-China spat, it added, that means it’s no longer possible to predict free cash flows out to 2020.
Rattled investors promptly knocked off as much as $8 billion from Samsung’s market capitalisation. Japanese suppliers accounted for 70% to 90% of global production of the chip-manufacturing and display materials in question; analyst Mark Newman from Bernstein reckons that for one of these there are no alternative suppliers. Absent a quick resolution, this will wreak havoc for Samsung’s supply chain, forcing it to race for alternative options - where it can.
The company has long suggested chip demand would recover in the second half of this year, as appetite for 5G-powered smartphones and computers, as well as servers used in data-centres, rebounds. Indeed, Samsung again reiterated this outlook. But with higher input costs ahead, plus likely disruption as Tokyo prepares to extend export restrictions, investors are right to be sceptical.
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