Japan's Canon said yesterday it had found problems with equipment for making liquid crystal displays (LCDs), boosting shares in LG.Philips and other LCD makers as fears of a supply glut eased. Any shortage of equipment for making LCDs could slow the start of new factories already under construction, easing a surplus of supplies caused by consumer reluctance to buy expensive flat-screen televisions.

Shares in LG.Philips LCD Co Ltd, the world's number two maker of LCDs, jumped 3.9% to close at 37 400 won after Merrill Lynch said Canon was having technical problems with new steppers, critical machinery for making LCDs.

"Things are looking good for LG.Philips. The problems in stepper production at Canon are going to increase prices," said Park Kum-yung, a fund manager at Mirae Asset. "That is not necessarily just a short-term increase, because there is a perception that panel prices will be bottoming out earlier than what the market had forecast."

Canon experienced problems in the optical units of its latest stepper series, the MPA-8000, of which it has shipped about 30 units since July, said spokesman Tomokazu Shinozaki. That is almost a third of its planned total shipments this year. The company will halt shipments of the latest series of the steppers until February, he added.

It was unclear how many of the steppers, which etch circuit patterns onto LCDs, are troubled and whether problems came to light in tests of equipment or after customer complaints, he said, declining to disclose the buyers of the equipment.

Canon's stock dropped 1% in Tokyo trading to close at 5 110 yen, but shares of Nikon, the other major supplier of LCD steppers, rose 4% to 1 160 yen.

LCD prices get a boost

Merrill Lynch said any significant pushback in 2005 capacity increases could help LCD panel prices bottom out earlier than its current forecast of the second quarter.

"The impact from this issue is obvious -- in a worst-case scenario, new production lines would be significantly delayed until the problems can be resolved by Canon and the steppers reinstalled in the factory," Merrill Lynch said in a note to clients.

Flat-panel prices have nose-dived because consumers are not buying the TVs in the volumes expected by makers spending billions of dollars to ramp up production.

In September alone, prices for 20-inch LCD TVs fell 3.8% to $857 in the US, according to an industry study prepared for Reuters and published on Tuesday.

Repair costs are expected to be less than one billion yen ($9.72 million), and the repair and inspection process will be completed within three to four months, Canon's Shinozaki said.

In October, Canon lowered its forecast for shipments of LCD steppers in 2004 to 104 units from 125. Canon shipped 95 LCD steppers in 2003.

The problem is expected to have limited impact on Canon's profit for this year following the reduced forecast, said Hisashi Moriyama, senior analyst at JP Morgan in Tokyo.

"But the expected delay in shipments of new equipment for a few months may add to worries over its already slowing LCD equipment operation and cause some negative impact on Canon's earnings next year," he said.

There's little chance of Canon's customers switching to Nikon as the machines were huge and take a while to set up, Moriyama said. The problem would hurt supply of LCDs and could jack up their price, though, he added.

Shares in Taiwanese makers AU Optronics and Chi Mei Optoelectronics gained 0.98% and 0.74% respectively.

Samsung Electronics, the top LCD producer and the world's biggest memory chipmaker, added 0.34%. Merrill said Samsung was one of the companies most vulnerable to the development as its new plant was largely dependent on Canon.

Analysts said LG.Philips' possible inclusion in the KOSPI 200, a blue chip index, also helped to boost its share price, which gained over 5% on Wednesday, as many funds track the index.