iSuppli Issues warning on short-term<br>DRAM market conditions

After iSuppli upgraded its rating of near-term conditions for DRAM suppliers to “Neutral,” up from “Negative” on April 25, the market bottomed out and manufacturers’ profitability improved during the second quarter. Following months of losses, a few top-tier suppliers managed to attain profitability starting in June and a handful are expected to do so in the third quarter. However, the market is showing renewed warning signs, with OEM contract prices for DRAM likely to decline in August and September. The main question now facing the industry is how much prices will decline during the third quarter. “The average DRAM contract price is expected to decline by more than 10 percent from the current level by the end of the third quarter,” predicted Nam Hyung Kim, director and chief analyst, memory ICs, at iSuppli. “The inventory level in the channel and among PC OEMs has increased compared to the second quarter. Global economic conditions are adding more uncertainty on the demand side of the equation.” Piling on to the industry’s woes, DRAM shipments exceeded expectations in the second quarter, causing prices to decline in the third quarter. iSuppli’s preliminary estimate is that DRAM unit shipments increased by 15 percent in the second quarter compared to the first, which was much higher than the anticipated 10 percent rise. “The higher-than-anticipated increase in unit shipments in the second quarter signals that excess-inventory is being shifted from the DRAM suppliers to the buyers,” Kim noted. iSuppli is maintaining its “Neutral” rating for DRAM market conditions for suppliers at this time. However, iSuppli will continue to watch near-term developments in market fundamentals to determine if a rating update is required. The inevitable recovery When will the DRAM industry bounce back from its current malaise? DRAM suppliers now are reducing their capital spending levels, a development that eventually will cause supply levels to become more constrained and prices to rise—leading to a recovery in the industry. However, this recovery is likely to take place slowly. DRAM wafer output will rise by a small margin of only 10 percent in 2009, compared to 40 percent in 2007, iSuppli predicts. However, the Top-2 DRAM suppliers, Samsung Electronics Co. Ltd. and Hynix Semiconductor Inc., are engaging in an aggressive migration to the sub-60 nanometer manufacturing process, boosting their output and raising the risk of further oversupply that may linger into the first half of 2009. This could delay a market recovery until the second half of 2009. A temporary NAND rally In a press release issued on April 25, iSuppli predicted the NAND flash memory spot market price rally that occurred early in the second quarter would be short lived, a forecast that proved to be correct. After iSuppli slashed its NAND flash forecast early this year, the market has been mired in terrible conditions, primarily due to a major inventory overhang and weak consumer spending that has led to oversupply. However, suppliers apparently took heed of iSuppli’s warning and have been adjusting to the oversupply ever since. Because of this, the supply/demand equation is expected to come back into balance by the fourth quarter, according to iSuppli. This means that the NAND flash suppliers will suffer for one more quarter before pricing should begin to recover.