DRAM market rating upgraded to neutral

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DRAM market rating upgraded to 'neutral'

Is iSuppli's neutral rating with positive bias giving indications that the worst is over for DRAM suppliers?

Tuesday, April 29, 2008

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DRAM suppliers early this year said they plan to cut their capital spending on production capacity by about 40 percent in 2008 compared to 2007. But due to a lack of profitability and diminishing cash reserves over the past several months, many suppliers won't be able to afford spending even at such a reduced level, and may slash their capital outlays by an even greater margin this year. This should cause capital spending for the industry as a whole to decline by more than 50 percent in 2008 compared to 2007.

"With these capital spending cuts, DRAM megabyte shipment growth for the industry as a whole is expected to slow in 2008," Kim noted. "Originally, megabyte shipments were expected to rise by 61 percent in 2008, compared to an 89 percent rise in 2007. However, potentially reduced capital expenditures will lower iSuppli's previously estimated 61 percent increase to the mid-50-percent level this year. This will result in a more balanced supply/demand outlook in the second half of the year, stabilizing DRAM prices and profits."

One exception to this trend is leading DRAM supplier Samsung Electronics Co. Ltd., which is expected to actually increase its rate of megabyte production in 2008 by 87 percent compared to 86 percent in 2007.

"Everyone knows a rebound in the DRAM market is inevitable; the only question is when," Kim said. "The DRAM market is inherently cyclical, meaning a market recovery is certain to arrive." Kim predicted DRAM market conditions will slowly improve starting in the second quarter of 2008. "Nonetheless, the improved market conditions don't mean that suppliers can achieve profitability in the near term," Kim said.

"The average per-megabyte price for commodity DRAM has dropped by more than 80 percent during the last 12 months," Kim observed. "Thus, in order to return to pricing levels from a year ago, suppliers would need to increase prices by 500 percent, boosting them to $6, up from $1—an impossible occurrence.

"Because of this, DRAM suppliers will still face major barriers to profitability in the near future. If poor market conditions persist for a few more quarters, some suppliers may face bankruptcy risks due to shortages of cash. Depending on their cost control efforts, the improving supply/demand situation will spur a return to profitability for the surviving competitors in the second half of the year."

Although iSuppli has upgraded the near-term rating to neutral, there are still many risks associated with the suppliers' high inventory levels. Until iSuppli detects reasonable inventory reductions among suppliers, it won't upgrade the near-term condition rating to positive.

A temporary NAND rally
The troubled NAND market received some slightly positive news with word of a price rally in the spot memory market. However, the fundamental underlying market conditions have not changed significantly. iSuppli predicts the current spot market price rally will be short lived.

©CIOL Bureau

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