OEM Buyers Face Supply Tightness
By Nam Hyung Kim
Silicon Strategies
03/25/2004, 9:45 PM ET
The following column was provided by Nam Hyung Kim, a principal analyst with iSuppli Corp., an El Segundo, California-based market research firm.
Asian spot market pricing for 256Mbit Double Data Rate (DDR) SDRAM surged by nearly 11 percent on Monday, as speculators reacted to news of political instability in Asia and production delays at a major supplier.
The price increase represented the largest one-day rise this year. The surge was echoed on the U.S. spot market, where prices for 256Mbit DDR266, 333 and 400 increased by more than 10 percent this week. The table presents DRAM pricing trends on the U.S. spot memory market.
The dramatic rise shocked traders and buyers, given that March historically has represented one of the slowest months of the year for the DRAM market. Market participants attributed the price increase to growing political uncertainty in Taiwan as well as Infineon Technologies AG's official announcement Monday of a delay in its migration to the 0.11-micron process.
Moreover, DRAM demand is picking up, with some major module manufacturers commencing aggressive purchasing programs. This has further constrained supply on the Asian spot market, helping to send prices higher.
Perhaps more importantly, there are signs that PC OEMs' demand for DRAM is accelerating. Sources have told iSuppli that DRAM sales in the United States have been dramatically increasing since the beginning of March, indicating that the corporate replacement cycle is continuing to progress.
With prices undoubtedly on the upswing in March, the question on everyone's mind now is how DRAM pricing trends will shape up in April, which historically is the very slowest month of the year. DRAM megabit sales typically fall by 10 percent in April, while Average Selling Prices (ASPs) decline by 1 percent.
However, this pattern is unlikely to recur this year, iSuppli believes.
The main reason why this is unlikely to happen is that ASPs have been exceptionally strong so far in 2004. Furthermore, demand is robust, with tier-one DRAM suppliers reporting they are barely able to meet booked orders from PC OEMs.
With supplies tightening, suppliers say they are unable to support any upside orders from OEMs. The DRAM business has decisively shifted from a buyers' market to a sellers' market.
OEMs now are paying high prices for DRAM due to technology-migration challenges and product-mix issues at suppliers, which are spurring DRAM supply constraints. For example, Micron Technology Inc. in a conference call this week confirmed it would shift more of its DRAM production capacity to non-DRAM products this year. iSuppli recommends that buyers develop risk-management plans to prepare for a possible DRAM shortage this year.
OEM contract prices remain lower than spot-market prices. Therefore, OEM prices are expected to increase again in April. As for the spot market, iSuppli is making a cautious prediction that prices may be adjusted downward in the second quarter. High spot-market DRAM prices may compel some traders to liquidate their inventories at that time.
However, the near-term outlook for pricing remains positive, with tight supplies further limiting spot-market availability during the coming weeks. iSuppli will be watching the spot market closely to see how high prices will go.
When OEM prices begin to exceed spot prices, it could signal a shift in market conditions. While today's sellers' market could evaporate in the second quarter, iSuppli is maintaining a "Positive" rating of conditions for the DRAM industry.
Nam Hyung Kim can be reached at the following address: nkim@isuppli.com
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