Silicon wafer prices are estimated to further rise 20% on average in 2018 after posting the same size of hike in 2017 on robust market demand, and the quotes are expected to trend upward through 2020, weakening the profitability of foundry houses while significantly driving up revenues and profits of wafer suppliers, according to industry sources.

The sources said silicon wafer prices began to rebound in the beginning of 2017 and picked up quarter by quarter in the year, bolstered by explosive increases in demand for wafers from automotive electronics, IoT, memory, AI, and cryptocurrency mining sectors. In addition, limited capacity expansions by the world's top five suppliers have turned the oversupply into shortfall, further driving up the quotes. The world's top five suppliers - Shin-Etsu, Sumco, GlobalWafers, Siltronic and SK Siltron - together command over 90% of the global silicon wafer supply.

With the uptrend lingering for wafer quotes, Taiwan Semiconductor Manufacturing Company (TSMC) indicated earlier that its gross margin rate may fall by 0.5-1pp on price hikes in 2018, compared to a smaller drop of 0.2pp in 2017 made possible by the annual contract signed earlier with wafer suppliers.

Market watchers said that TSMC and other first-tier foundry houses are expected to see their gross margins further eroded in 2019 based on renewed supply contracts for the year. They added that second-tier players such as Globalfoundries, Vanguard International Semiconductor (VIS), United Microelectronics (UMC), and Semiconductor Manufacturing International Corp (SMIC) are likely to suffer higher-than-expected drops in gross margins.

Windfall earnings for wafer suppliers

On another front, Taiwan wafer suppliers have netted handsome profits from the ever-higher wafer quotes. GlobalWafers, for instance, saw its 2017 net earnings skyrocket 461.3% on year to NT$5.27 billion (US$175.93 million), with EPS for the year hitting a historic high of NT$12.68. The company's EPS for the first quarter of 2018 also set a new quarterly high of NT$6.36.

Meanwhile, Formosa Sumco Technology (FST), a joint venture between Taiwan's Formosa Plastics and Japan's Sumco, posted an EPS of NT$2.89 for 2017, sharply up from NT$0.94 in 2016. The company's net profits for the first quarter of 2018 shot up 280% on year to NT$1.128 billion, more than half of the total earnings for 2017, and its gross margin rate for the quarter also soared sharply to 39% from 19.45% of a year earlier.

FST vice president RS Chao said at a recent investors conference that his company has seen clear order visibility through 2020, with quotes to stay on the track of steady rise in the next few years.

Chao said that FST will see major shipment growth momentum come from robust demand for silicon wafer from new wafer foundry fabs and memory plants in China, adding that demand from the China market will surge 135% during 2017-2020.

FST now mainly produces 8-inch and 12-inch wafers, contributing 40% and 60%, respectively to the firm's revenues.