The company is now estimating that the surplus has halved to $500 million in the first quarter from $1.03 billion in the fourth quarter of 2004. The company had previously predicted that the value of the surplus would diminish by 24 percent to $780 million in the first quarter of 2005. "The reduction of excess semiconductor inventory in the historically slow first quarter of the year is undeniably a positive development for the global chip industry," said iSuppli analyst Rosemary Farrell, in a statement.

"Better-than-average sales of bellwether semiconductor products including microprocessors, digital signal processors (DSPs), discrete devices, high-performance analog parts and power-management chips helped reduce excess inventories in these areas. Most companies in the electronics supply chain expect to burn off their oversupply by the end of the second quarter, and a number of firms have even said they expected their overage to be completely eliminated by the end of the first quarter of 2005," Farrell added.

Semiconductor suppliers continue to hold the bulk of surplus chip stockpiles. However, these companies reduced their "days of inventory" by 33 percent in the first quarter, according to iSuppli's preliminary estimate.

But semiconductor suppliers continue to struggle with weak market conditions, iSuppli said. Lead times remain short, chip orders were slow in March, results from IT companies have been poor and some electronics companies have issued muted outlooks for the second quarter. Furthermore, the inventory environment remains tentative in some regards. While safety stocks in the supply chain are quite low, visibility presently is quite limited, iSuppli concluded.