The cost of LCD TVs could drop dramatically over the next few months forcing retailers with old stock to lose money.

The problem is due to less than expected sales of LCD TV panels in the first half of this year, LCD TV panel inventory is piling up and oversupply may worsen this year, as panel makers ramp up more capacity, according to DisplaySearch.

Only slightly more than four million LCD TVs were sold in the second quarter of this year, which was less than panel makers expected, as they shipped six million LCD TV panels, 40% more than they shipped in the first quarter, DisplaySearch stated. Cumulative inventory will build up to 5.5 million TV panels this quarter, and oversupply may worsen, as panel makers such as Samsung Electronics, AU Optronics (AUO), Chi Mei Optoelectronics (CMO), Chunghwa Picture Tubes (CPT) and Quanta Display will add new capacity this year, DisplaySearch said.

Although LCD TV panel shipments are expected to increase 12% this quarter to 6.7 million panels, shipment growth will slow to 1.4% in the fourth quarter, despite it being the hot season, as downstream vendors looks to cut down their inventory, DisplaySearch forecast. The stock prices of AUO and CMO recently dropped amid general concerns over weak market demand expected for the first half of 2006. AUO’s stock price closed below NT$50 while CMO’s stock fell below NT$40, with both stocks being at their lowest levels in a month.

However, iSuppli remains more optimistic and has forecast that the LCD TV market will pick up significantly in 2006. The research firm also said it is likely that panel supply may run short of demand in the second half of 2006.