World's Memory-Chip Makers
Revel
As Prices Rise, Buying Season Nears
By RUSSELL FLANNERY
Staff Reporter of THE WALL STREET JOURNAL
HSINCHU, Taiwan -- The good times are rolling again
in the volatile computer-memory business as prices for
benchmark chips hover near five-month highs and peak
demand in the second half of the year approaches.
Prospects for improved earnings have given a boost to
the share prices of the world's largest memory-chip
makers, and many analysts say there may be more gains
to come. Shares in U.S.-based Micron Technology Inc.
last week traded at their highest levels for this year,
while shares in South Korea's Samsung Electronics Co.
have jumped by more than 20% since late May.
What's good for memory-chip makers is good for the
semiconductor industry as a whole. That's because when
makers of dynamic random access memory, or DRAM,
chips -- the most commonly used computer memory chip
-- run into price and oversupply problems, they usually
spread their pain to other segments of the industry by
trying to switch capacity into other products.
For now, DRAM manufacturers and analysts are
sanguine about the outlook. "We're quite optimistic,"
says Eric Tang, vice president and spokesman at
Powerchip Semiconductor Corp., a DRAM-making
affiliate of Japan's Mitsubishi Electric Corp. Powerchip
actually had a loss of 172 million New Taiwan dollars
(US$5.6 million) on its operations in the first three
months of this year because of low prices, compared
with a profit of NT$232 million a year earlier. Yet the
company is standing by a forecast for net profit of
NT$7.6 billion for the full year because of improved
prices and increased capacity, Mr. Tang says.
A Banner Year
This year is shaping up as a banner year for DRAM
makers and the global semiconductor industry. Growth in
Internet use and wireless communications will help to
boost total industry sales this year to US$195 billion --
up 31% from 1999 -- according to a recent forecast by
the Semiconductor Industry Association, a U.S.-based
industry group. DRAM shipments will help lead the way,
with a 42% jump in world-wide sales to US$29 billion,
the association predicted.
Today's buoyant memory market contrasts with a
semiconductor-industry downturn in 1996-1998, when
prices and profits were hammered by oversupply.
DRAM prices recovered strongly last year, getting an
especially big shot in the arm in September when a
massive earthquake disrupted production in Taiwan, one
of the world's four biggest manufacturers, along with
South Korea, the U.S. and Japan. But they fell afterward,
especially in January, when peak holiday demand
passed.
Yet the picture has
improved for makers in the
past several weeks. Spot
prices for benchmark
64-megabit DRAM last
week reached US$8.20,
compared with lows of less
than US$5 in February.
Although spot prices have
slipped in the past few days,
Powerchip, for instance,
sees a rebound to as high as US$10 before year end on
strong demand ahead of the back-to-school season in the
U.S. and Europe and Christmas shopping period.
"Around US$9 to US$10 is quite conservative," says
Powerchip's Mr. Tang.
Many industry analysts say the optimism among
manufacturers isn't exaggerated. "Demand from PC
makers should grow in the second half," sending the spot
price of 64-megabit DRAM to more than US$10 per
chip, says Andrew Lu, head of regional semiconductor
research at Salomon Smith Barney Taiwan Securities
Ltd. In turn, Mr. Lu sees a rise of as much as 40% in the
share price of Powerchip and other Taiwan DRAM
makers before year end.
Strong Spot Prices
Strong prices on the spot market, where roughly 10% of
semiconductors are traded, augur higher longer-term
contract prices for the industry as a whole, says Don
Floyd, regional semiconductor analyst at CLSA
Emerging Markets in Taipei. "Contract demand right
now is very strong, and manufacturers have confidence
they can pass on higher prices into the fourth quarter," he
says.
ProMOS Technologies Inc., a Hsinchu-based joint
venture between Taiwan's Mosel Vitelic Inc. and
Germany's Infineon Technologies, believes continued
price rises in the second half will help boost its net
profit to NT$10 billion from NT$6 billion in 1999,
according to spokesman Albert Lin.
Looking ahead to 2001, earnings of DRAM makers
should hold up in part because the industry's traditional
nemesis -- excess capacity -- isn't likely to create major
problems, says Mr. Floyd. Although overall investment
by the inustry is soaring this year, much of the industry's
new spending is headed for areas besides DRAM,
reducing pressure on memory prices, he says.
To be sure, the rosy outlook for DRAM makers in the
second half of the year could be thwarted by an abrupt
dimming of the U.S. economic picture. And another big
drop in the Nasdaq stock market could hurt shares. But
with DRAM stocks and spot prices on the rise, many in
the industry aren't too concerned right now.
Write to Russell Flannery at russell.flannery@awsj.com |
