Flat panel makers are cutting capacity during their peak season following a sudden drop-off in demand, a rare step that raises concerns the next downturn in a notoriously cyclical industry might come earlier than expected.

AU Optronics, the world’s third-largest manufacturer of LCD panels, said on Thursday it planned to use just 90 per cent of its capacity in the current quarter whereas its fabs, or fabrication plants, had been fully loaded in the past three months.

AUO said according to its calculations competitors were also cutting capacity use. Chen Hsuan-bin, president, said: “This is the first time in a decade that the industry will be lowering the load factor in the busy season.”

AUO said it was “cautiously optimistic” that the weakness was temporary, and end-user demand would rebound towards the end of the year.

But analysts have said the drastic step of cutting the load factor now could further drive the company’s share price down. “The danger is that this will be seen by the market as a confirmation of faltering demand and taken negatively,” said Matt Evans, an analyst at CLSA, in a research note.

Flat panel prices have started to slide after computer and television makers suddenly began cutting orders in June.

Mr Chen said: “[The weakness] set in following the global macroeconomic fears triggered by inflation and the renewed subprime trouble,.”

The adjustment caused AUO to miss its shipments and earnings forecast for the second quarter and come up with a very cautious outlook for the current quarter.

The company’s net income for the June quarter was T$20.39bn, up 5.6 per cent compared with the same period in 2007 but down 24.4 per cent quarter-on-quarter.

AUO predicted shipments of panels larger than 10 inches size would rise about 5 per cent in the third quarter but average selling prices would slide. Panels for use in monitors and notebook computers would sell about 15 per cent cheaper, while prices for television panels would drop about 5 per cent, said Max Cheng, CFO.

LG Display, AUO's larger rival, also warned of a panel price slide this year. Samsung, the world's largest panel maker, is due to report quarterly results on Friday

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