Singapore’s GLC hurt by high oil prices

July 25, 2008
Singapore Democrats

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Pearl Bantillo
Thomson Financial

Singapore-based chipmaker Chartered Semiconductor Manufacturing Ltd. is looking at charging customers higher prices in the fourth quarter, as profit margins suffer from rising operating costs.

“This is not business as usual. In the short term, there is nothing much we can do internally to mitigate the cost so we will try our best to help our customers ease into it,” Chartered President and Chief Executive Chia Song Hwee told Thomson Financial in an interview.

“But clearly it is not an easy thing to execute.”

Chia said cost pressures have intensified due to the unprecedented surge in oil prices, which climbed to a record $147 a barrel early this month. The spike in commodity prices also constrained gas and chemical supplies for the company.

“Due to the margin decline that we have seen in the past few quarters, we can no longer absorb the cost increases,” he said.

Discussions have been initiated to share the cost burden with customers, which have expressed initial resistance to the idea while cognizant of Chartered’s concerns.

“We are hopeful that we can implement the cost sharing with our customers in the fourth quarter timeframe,’ Chia said.

The company’s energy costs are expected to shoot up in the fourth quarter upon expiry of long-term fixed rate contracts for power supply that shielded Chartered from the impact of high oil prices in the past.

“Yes, there is risk of business not coming through,” said Chia. Taking into account customers’ negative reaction to the proposed cost-sharing, Chartered’s wafer starts this quarter will be 10 percent less than in the second, expecting gross margins to be hit.

Chartered reported Friday that it swung to a net profit of $40.9 million in the second quarter from a loss of $27.7 million a year ago after a tax credit, but gross profit declined due to excess inventory and weaker demand.

In the third quarter, the company is forecasting a net loss ranging between $24 million and $34 million and revenue of between $469 million and $481 million.

Chia said it is still possible that fourth quarter revenue will be better than the third quarter based on customers’ demand forecast. There were pockets of weakness across the industry “but not broad-based enough for us to say the demand will drop significantly,” he said.

“But given the increased uncertainty, nobody can really predict on what is going to happen,” said Chia. “Everything is kind of up in the air.”

Despite the difficult business environment, Chia said Chartered’s $750 million capital expenditure this year will proceed as planned, in line with the company’s long-term objective of supporting the needs of its customers.

The spending will be higher than what Chartered has originally forecast at the start of the year as it will spend an extra $160 million to boost its 45-nanometer technology capacity.

“I know this is not, from the timing standpoint, a good time for us to talk about spending more money. As painful as it is, we have to stick to our strategic direction to invest to enable our capacity to support our customers’ product migration.

“If we don’t do that, we will end with a big void in revenue two years down the road when we don’t have enough customers and revenue,” he said.

($1 = S$1.36)

http://www.tradingmarkets.com/.site/news/Stock%20News/1782007/