The following column was provided by Nam Hyung Kim, a senior analyst with iSuppli Corp., an El Segundo, Calif.-based market research firm.
The DRAM market appears to be gaining momentum, with increased orders from PC OEMs boosting spot market prices. However, appearances can be deceiving, with the size of the orders artificially magnified by a spate of double booking, iSuppli Corp. believes.
As iSuppli noted earlier this month, some of the pricing action in the DRAM market now appears to be driven by a real rise in end demand, in contrast to recent increases inspired by pure speculation. PC OEMs in China had been increasing DRAM orders so as to accommodate growing demand, a development that reflects normal seasonal sales trends.
Furthermore, new positive signs are appearing in the PC market. Corporate PC orders are beginning to increase due to rising IT investments. Strong growth in PC shipments in the second quarter boosted OEMs' optimism regarding the second half.
Thus, DRAM prices continue to increase on the U.S. spot market and elsewhere. Most of the increases are coming in Double Data Rate 266 (DDR266) and DDR333 SDRAM, which experienced price rises of 14 percent and 11 percent, respectively, this week.
However, the rising optimism has a dark side: in anticipation of stronger growth to come, PC OEMs appear to be ordering more than their immediate needs would dictate. A pricing recovery built on double ordering is not sustainable, setting the market up for a correction, possibly at the end of August or in September, iSuppli believes.
In the meantime, OEMs may continue to boost DRAM prices. The average price of a 256-Mbyte DDR DIMM already has reached $40 in the spot market and between $35 and $38 in OEM contract negotiations. DDR DIMM prices could rise as high as $40 to $45 in August, which would represent a pain threshold for PC OEMs through which they will not want to cross. At $40 to $45 per DIMM, DRAM prices will begin to create a bottleneck in PC bills of materials (BOMs), forcing OEMs to cut other features in their computers.
At this point, double ordering will cease, sending DRAM prices down, although increases will continue until that time.
Portents of this price decline are already appearing; some spot traders have lost confidence in the market recovery. These traders have begun selling off their inventory, a trend that iSuppli predicts will continue through the end of the month.
Despite all the positive news these days, iSuppli remains cautious about the timing of the DRAM market recovery. The market obviously has reached the bottom and is moving in a positive direction. But in order to gain sustainable momentum, the market will have to experience demand driven by a real rise in end-application sales, not by speculation and double booking.
Although iSuppli foresees continued uncertainty in pricing and demand, the normal seasonality of the PC market will boost DRAM prices enough in the second half to ensure that worldwide DRAM market revenue grows by a double-digit margin in 2003.
Nam Hyung Kim can be contacted at the following email address: email@example.com