The following column was provided by Nam Hyung Kim, a senior analyst with iSuppli Corp., an El Segundo, Calif.-based market research firm.
In the volatile DRAM industry, change is the norm, with fluctuations in supply and demand bringing nearly continuous swings in pricing and availability. So why do DRAM prices seem to frozen in place in recent weeks?
U.S. spot market prices have decreased for five consecutive weeks now. However, weekly declines have been minimal, that is within the 1 percent range.
There are two fundamental reasons why DRAM prices aren't moving, iSuppli Corp. believes.
First, spot-market traders have virtually stopped buying DRAMs from suppliers and are holding onto their inventory tightly. Some traders have already cashed out their stockpiles and now have gone into wait-and-see mode.
Second, because of present low demand levels in the spot and contract markets, DRAM suppliers are accumulating inventory, rather than selling products. DRAM suppliers' inventory now has risen to the four-to-five week level.
Historically, DRAM shipments have been very high in September. However, conditions are different in 2003 as suppliers and buyers hang fire while they see how market conditions develop. iSuppli expects that prices will oscillate only slightly through the remainder of September, depending on developments in inventory levels.
However, once PC OEMs commence their Christmas component buying cycle in October, spot market prices will increase, but not dramatically, iSuppli predicts.
A good sign for the DRAM market in 2003 is the fact that none of the players along the supply chain has gone into a panic mode. Because of that, and other factors, iSuppli doesn't expect a pricing collapse in 2003.
Other factors contributing to iSuppli's view on pricing include low inventory levels among spot DRAM traders.
While DRAM suppliers' inventory levels have increased, their stockpiles are not large enough to trigger an alarm. When the DRAM market collapsed in 2001, suppliers carried 10 to 12 weeks of inventory. With the present four to five weeks of inventory, suppliers will not clean out their stockpiles until they swell to more than 10 weeks in size.
Thus, iSuppli does not foresee any major product dumping this year, even if the worst-case scenarios come true in the DRAM market.
Another factor pointing away from a collapse is the fact that spot market prices are holding steady. Spot market prices are a leading indicator of the contact market, and usually fall first when traders begin dumping their inventory. However, since traders have not bought DRAM recently, and already have adjusted their inventory levels, spot market prices aren't falling, iSuppli believes.
DRAM prices now are higher than when the traders were accumulating inventory, thus they have no incentive to sell their stockpiles in the near term. However, since the spot market is shallow, with very low volumes of product flowing through it, movements by just a few large dealers could change the environment completely.
But at least for now, and in the near future, this is unlikely to occur, and spot market prices are unlikely to drop precipitously, iSuppli believes.
Looking at the contract area, suppliers already failed to increase OEM prices in the first half of September. If suppliers can manage to maintain present contract prices levels for next round of OEM negotiations for the second half of September, iSuppli will declare that the suppliers have won their pricing battle with OEMs.
OEMs, suppliers and traders in the DRAM value chain now all are being extremely cautious about market demand. Even a small negative signal regarding demand in the fourth quarter could impact the market badly. However this is unlikely happen based on current PC supply channel signals in the motherboard area and for other components.
However, iSuppli is monitoring the situation closely to see if any negative sings appear.
Nam Hyung Kim can be contacted at the following email address: firstname.lastname@example.org