The following column was provided by Nam Kim, a senior analyst with iSuppli Corp., an El Segundo, Calif.-based market research firm.
The shrinking white-box PC industry has reduced the number of transactions on the DRAM spot market. Thus, some experts have reasoned that spot market trends are no longer a valid leading indicator of pricing developments in OEM contract negotiations.
Those experts are wrong.
The spot market remains a valid and important leading indicator of pricing developments in the DRAM industry.
True, the white-box market is becoming smaller, reducing the number of spot-market transactions. However, bit supply from the DRAM makers also has decreased, thus reducing the amount of memory sold on the spot market. With both supply and demand shrinking proportionally, the spot market has remained calibrated to detect changes in availability and requirements for DRAM.
At the same time as spot-market transactions have decreased, contract activity has accelerated. The net effect of these supply and demand trends has been a reduction in spot-market exposure for the DRAM makers.
Nonetheless, when DRAM is in a state of over-supply, even by just a few percentage points, the over-production will spill into the spot market and pricing will be affected. Conversely, when DRAM is under-supplied, the flow of parts to the spot market will dry up, sending prices soaring.
The smaller size of the market means that spot prices have become even more sensitive to changes in demand and inventory levels. Thus, the slimmed-down spot market of today could be an even better leading indicator of pricing trends than the larger spot market of the past.
One of the main reasons why iSuppli still believes that the DRAM market has not fully entered into a recovery is that spot-market prices remain in stasis. There has been very little movement in spot-market DRAM pricing in recent weeks.
If a recovery is coming, supplies on the small and highly-sensitive spot market will dwindle, sending prices higher. This obviously has not occurred.
Some pundits have taken the argument about the reduced importance of the spot market one step further and have opined that the contract market now is a leading indicator of spot market trends, a complete turnaround from history. iSuppli believes this argument has no merit at all; contract prices are lagging and will continue to lag spot market prices.
Another reason why the spot market remains relevant is the power of the information held by the spot traders. Like stock traders, DRAM traders live day-to-day and hour-to-hour by the credo: "Buy low, sell high." Most traders on the Asian spot market either hail from DRAM suppliers or are well connected to reliable sources.
Although the spot traders' information sometimes is more rumor than fact, most of the time it is accurate and available very quickly, so it has a major impact on market prices.
A third reason why the spot market remains relevant is the fact that OEM buyers refer to spot prices when they negotiate with suppliers. The stability in contract prices over the past month reflects steady spot prices.
For all these reasons, iSuppli believes the spot market remains a valid leading indicator of overall DRAM pricing trends, and we will continue to monitor it closely.
Other DRAM news
In other DRAM news, suppliers are phasing out production of low-density SDRAM, such as 16-Mbit and 64-Mbit parts, generating a shortage.
Exacerbating the shortage is the fact that Hynix, one of the major suppliers of these products, cannot ship them to the European Union or the United States due to tariffs.
iSuppli recommends buyers develop a clear sourcing strategy to accommodate this situation.?
Nam Hyung Kim can be contacted at the following email address: email@example.com