The rush by Asian liquid-crystal-display makers to ramp up production at home and to invest in new plants threatens to curtail the nascent recovery in the flat-panel market.

LCD makers in Asia have just started to see their earnings recover in the second quarter after prices began to rise thanks to production cuts made last year, component shortages and strong demand from China. But another supply glut could be looming as soon as the current quarter as companies such as Sharp Corp., Samsung Electronics Co., LG Display Co. and AU Optronics Corp. ramp up production from new lines.

“With the glass shortage diminishing in Taiwan, and [eighth-generation plants] ramping up in Korea, supply is growing faster than demand,” said Paul Semenza, senior vice president at U.S. market research firm DisplaySearch.

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Liquid crystal display panel inventory is still higher than demand for the panels, despite deep discounting in stores, write the research folks at Avian Securities this morning. Based on “ad hoc checks,” the report observes, while heavily discounted items are being sold, overall inventory is still above demand. The report notes that there are rumors of mergers being encouraged by the Taiwanese government between LCD panel makers AU Optronics (AUO) and Chi Mei Optoelectronics, but opines that “we find little to be excited about unless such a combination reduced capacity going forward.”

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The makers of LCD panels for laptops and TVs are pressing on with churning out the glass, no matter how badly the industry is doing, reports trade pub DigiTimes. In an article on its Web site, the paper says that despite an expected 10 to 20 percent drop in the first quarter of 2009 in already low utilization of factories at AU Optronics, Chi Mei Optoelectronics, and Chungwa Picture Tubes, the companies are not going to cease production entirely. Instead, they are asking employees to take unpaid holidays, for example, among drastic measures to keep lines running despite the fact that it is must be quite uneconomical to do so at this point.

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Shares of glassmaker Corning (GLW) and LCD panel producers AU Optronics (AUO) and LG Display (LPL) are all down sharply today amid a new wave of market jitters on the prospects for the flat-panel display market.

Several recent Street research reports note that conditions in the LCD panel sector have been difficult for much of the third quarter, raising questions about the companies’ ability to hit current Street estimates.

Brian White, an analyst with Collins Stewart, noted in a roundup piece on the electronics supply chain today that he visited last week with three leading Taiwan-based LCD panel makers, and came away with a “reinforced” cautious stance on AU Optronics, which he rates Hold.

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