Semiconductor Manufacturing International Corp (SMIC) reported robust second-quarter earnings and forecast strong demand up to the third quarter of next year - shaking off concerns of a slowdown in the cyclical chip industry. The Shanghai-based chipmaker is aggressively expanding capacity, and last week began pilot production at a new, advanced 12-inch wafer line in Beijing. Wafers shipments are expected to increase 23 to 27 per cent this quarter. Nevertheless, SMIC expected to receive more orders than it could handle in the months ahead. 'We still have capacity limitation difficulties. Our orders are still more than we can supply,' president and chief executive Richard Chang said. 'Overall, we see the backlog problem continuing to the third quarter of 2005.' SMIC yesterday reported second-quarter earnings of US$34.16 million, up 24.44 per cent from the first quarter, compared with a loss of $30.51 million last year. Revenue was $220.98 million, up 18.21 per cent sequentially and 193.89 per cent from a year earlier. The results were helped by a 2.6 per cent increase in average selling price per wafer to US$1,034, thanks to the use of more advanced process technology. The firm shipped 201,534 wafers in the quarter, up 15.6 per cent from the first quarter. Capacity utilisation was 99 per cent and SMIC expected the rate to remain close to 100 per cent in the present quarter. Mr Chang's optimism, however, contrasted with recent comments from analysts covering the sector. This month, Merrill Lynch downgraded the sector, worried that rising inventories at companies such as Intel Corp indicated end-demand was weakening. SMIC, however, said its own inquiries with customers found inventories were not a problem. 'About 80 per cent or more told us they have no inventory problems,' Mr Chang said. About 60 per cent of the company's capacity was allocated to long-term customers. 'That portion will protect us [in the event of a slowdown],' he said. Before the earnings release, CSFB analyst Ashis Kumar in a research note said he hoped SMIC would scale back capacity expansion plans and agree with concerns over rising inventories at customers. He noted customers Broadcom and Texas Instruments were slowing orders to digest inventory. 'There is an element of denial in adding capacity when utilisation rates are falling fast,' he said. SMIC shares rose one cent to $1.64 yesterday. Output at the 12-inch wafer line is expected to reach 3,000 to 4,000 wafers a month by the end of this year, rising to 17,500 wafers a month by the end of next year. The firm initially will make memory chips at the plant at the 0.11 micron and 0.10 micron process node. 'After these two products become mature, we'll gradually increase the logic portion,' Mr Chang said. He also dismissed Taiwanese media reports that SMIC had lost key North American customers. 'We did not lose any customers in North America. Instead, we gained four or five,' he said. Overall, SMIC added 15 new customers in the quarter.