The following column was provided by Nam Hyung Kim, a principal analyst with iSuppli Corp., an El Segundo, California-based market research firm.
A rise in spot market DRAM prices after the end of the Chinese New Year buying season has prompted some industry watchers to declare that pricing has hit the bottom and conditions are improving for suppliers. However, iSuppli Corp. remains hesitant to declare a shift in market conditions, given the fact that the fundamental factors controlling pricing have not shown any signs of changing.
One of these factors is the size of DRAM suppliers' inventories. Despite a decrease in overall semiconductor inventories, suppliers now are holding more DRAM than they need, iSuppli believes.
Given these inventory levels, it's difficult to take seriously talk of shortages or tightness in DRAM supply. There is presently no shortage in the DRAM market, besides some supply tightness for low-density SDRAM, which is no longer the mainstream, high-volume memory for PCs.
Another factor pointing to continued price weakness is the small number of transactions on the spot market.
The overall level of DRAM demand has not changed much since the beginning of January. Furthermore, most spot-market transactions now involve SDRAM, with limited sales of Double Data Rate (DDR) 333 and DDR 400 SDRAM.
More importantly, OEM demand remains lackluster.
With the number of transactions limited and skewed heavily toward SDRAM, pricing on the spot market has been artificially boosted. In an illustration of how this works, a 10 percent increase in spot market pricing means little if there are only a few transactions on the market. However, a 1 percent increase has a major impact if it affects thousands of transactions.
Thus, recent DDR price increases should not be interpreted as a sign of market recovery, iSuppli believes.
On the U.S. spot DRAM market pricing for the 32-Mbit by 8 DDR 333 has risen by 6.4 percent, while the 32-Mbit by 8 DDR 400 has increased by 7.8 percent.
Some observers have speculated that moves by suppliers to shift DRAM production to the more lucrative NAND flash have constrained supply and boosted prices. However, the impact of these shifts has been greatly exaggerated.
The re-allocation of DRAM capacity to NAND by new flash-market entrants like Hynix Semiconductor Inc, Infineon Technologies AG and Micron Technology Inc. will affect only about 1 percent of total worldwide DRAM manufacturing capacity this year. The impact of this re-allocation should only be psychological, and will not be a major factor in DRAM supply in 2004.
Samsung Electronics Co. Ltd.'s move to shift production from DRAM to NAND in 2003 did constrain supply and served to stabilize pricing. However, Samsung lost market share due to this shift, and the company is unlikely to sacrifice any more of its control of the DRAM business in 2004, iSuppli believes. The company at its recent earnings conference call said its DRAM bit growth in 2004 would be much higher than in 2003, indicating the company is unwilling to cede any more of the market to its competitors.
In summary, there is no near-term impetus that is changing market fundamentals, iSuppli believes. Thus, iSuppli is maintaining its "cautious" rating on the market.
With DRAM suppliers having successfully held the line on contract pricing for the second half of January, they now face the challenge of maintaining or increasing tags for the first half of February. However, because contract prices now are lower than spot prices, suppliers could gain leverage in their negotiations with OEMs, although OEM demand has not changed.
Nam Hyung Kim can be contacted at the following email address: firstname.lastname@example.org