Electronics Production | September 06, 2006

iSuppli Upgrades DRAM Market Assessment

Inventories at DRAM suppliers dropped to their lowest level in 20 months at the beginning of August, reflecting a fundamental improvement in market supply/demand-and prompting iSuppli Corp. to upgrade its estimate of near-term conditions for suppliers to "positive."
The global electronics supply chain held 1.92 weeks of DRAM inventory at the start of August, down 18.3 percent from an average of 2.35 weeks in July. This marks the leanest inventory level for DRAM since January, 2005, when stockpiles were at nearly three weeks.

DRAM inventory levels are being impacted by both supply and demand factors, iSuppli believes.

Sales have been on the upswing due to back-to-school demand for PCs. DRAM demand was further bolstered by record low prices for PC microprocessors. This left more money in PC Bills of Materials (BOMs) for larger amounts of DRAM, boosting sales.

On the supply side, the top DRAM makers had been shifting their production capacity to NAND flash. This reduced growth in DRAM bit production, allowing inventories to dwindle.

"With inventories at rock-bottom levels, DRAM prices are beginning to rise on the spot memory market," said Nam Hyung Kim, director and principal analyst with iSuppli.

"Contract prices increased in August, and are likely to continue to rise during the first half of September. Given these factors, iSuppli is upgrading its estimate of near-term market conditions for DRAM suppliers to positive, up from the 'neutral' rating we issued in July," Kim added.

Among different DRAM types, Double Data Rate (DDR) SDRAM parts had the lowest inventory levels at the start of August, at 0.99 weeks. Supplier have been reducing DDR production in favor of the newer DDR2 devices, causing inventory of the older memory to decline by 14.2 percent by the start of August. Meanwhile, strong demand for Intel Corp.'s legacy core logic chipsets, which work with DDR SDRAM, has driven up sales of the older memory type.

DDR2 inventory was higher than for DRAM overall, at 2.46 weeks.

iSuppli believes DRAM inventory was on the decrease throughout the remainder of August, and will continue to decline in September.

Despite the positive developments for the DRAM market, some risks remain. Leading memory supplier Samsung Electronics Co. Ltd. now is believed to be converting some of its capacity at one of its 200mm fabs from NAND flash back to DRAM. Samsung is doing this in order to cash in on the higher margins generated by DRAM compared to NAND.

Because of this, iSuppli expects Samsung's rate of growth in DRAM bit production in the third quarter to be much higher than in the previous two quarters. This rise in supply potentially could drive down pricing later this year.

The lean inventory situation for DRAM contrasts sharply to the run-up in overall semiconductor excess stockpiles seen in the second quarter. Much of the overall increase in semiconductor inventory has been due to rising stockpiles of older-generation Intel microprocessors and core
logic chipsets. While there are reports of increased inventory in other segments outside of microprocessors and core logic devices, the DRAM suppliers appear to have avoided the stockpile run-up.
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