Analyst: “Worst is over” for DRAM, but softness lingers

Apr. 25, 2008 – Industry analysis firm iSuppli is upgrading its rating of near-term DRAM market conditions to “neutral,” up from a “negative” assessment back in November, saying future conditions look to be positive and indications suggest “the worst is over for DRAM suppliers” — but the road back to market balance and profitability will still be bumpy in the near term.

DRAM oversupplies, excess inventories, and slumping ASPs have held sway over the DRAM sector for more than a year now. Average MB DRAM ASPs dropped an estimated 17% in 1Q08 according to iSuppli, more than the typical seasonal decline, though that’s much better than the 31% plunge in 4Q07. Reductions in channel inventories and lower levels of capital spending among memory manufacturers is bringing the supply/demand balance into better alignment — enough so that the firm actually projects a 2% increase in per-MB DRAM prices in 2Q08.

“Although the DRAM suppliers themselves are still carrying more inventory than normal, stockpiles in the channel have been reduced significantly,” said Nam Hyung Kim, chief analyst at iSuppli, in a statement. He added that PC OEMs’ DRAM inventories are at “optimal” levels, which means they should resume ordering again by 3Q for the holiday build season.

iSuppli calculates DRAM suppliers’ inventory/sales ratio at ~0.7-0.8 (meaning inventory is equivalent to 70%-80% of sales), well above what it considers a “healthy” range of 0.4-0.5. If this ratio comes down as expected, the firm said it would “likely” upgrade its DRAM market rating to “positive,” but didn’t offer a more specific timeline.

Capex cutbacks not enough

Despite its cautious optimism, iSuppli says that even DRAM suppliers’ stated capex cutbacks of ~40% this year may be insufficient due to continued losses and diminishing cash reserves, and projects many suppliers will slash capital outlays further — pushing capital spending for the industry as a whole to >50% this year. That should also slow DRAM MB shipments, originally pegged to rise 61% in 2008 (vs. 89% in 2007), perhaps down into the mid-50% range, which should also help balance the supply/demand picture in 2H08 and stabilize ASPs and profits, noted Kim.

Not everyone will be cutting back, though, Kim noted. Samsung Electronics is seen increasing its rate of MB production this year by 87%, nearly identical growth from 2007 (86%).

DRAM suppliers still face serious near-term hurdles to profitability, Kim noted. To make up the ~-80% slide over the past year in commodity DRAM per-MB ASPs, prices would need to spike by 500%, from $1 to $6 — “an impossible occurrence,” he pointed out. ” If poor market conditions persist for a few more quarters, some suppliers may face bankruptcy risks due to shortages of cash.” Those with better cost control will see better conditions in 2H08 and a return to profitability — those that are still standing, anyway.

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