DRAM oversupply could worsen in 2012

January 13, 2012 — The dynamic random access memory (DRAM) market is encountering an "alarming" rise in inventory, showing a counter-trend to the overall semiconductor industry in Q3 2011, finds an IHS iSuppli DRAM Market Brief. This is coupled with low capex, and reduced demand from end-market applications. IHS iSuppli, Deutsche Bank, and Barclays Capital weigh in.

The IHS iSuppli DRAM Inventory Index in Q3 2011 stood at 12.8 weeks, a 31% spike from Q2 2011 (9.8 weeks). Q3’s DRAM inventory was more than double the recent low point for DRAM inventory, 6.1 weeks seen in Q1 2010. The long-term quarterly average of 9.2 weeks. The DRAM Inventory Index measures the inventory value at the end of a quarter against the sales for the quarter. DRAM inventory in the index is held by memory suppliers, not by DRAM buyers. When more inventory is at DRAM producers, downward pressure is exerted on the chip selling prices.

Figure. Global DRAM inventory index. Source: IHS iSuppli January 2012.

DRAM memory is at a trough, says Barclays Capital, fresh off a week at International CES in Las Vegas. Capacity is off-line and the market is consolidating. Barclays sees solid-state drives (SSDs) as a major focus in 2012, adopted by ultrabooks and other apps. IHS iSuppli confirms, saying cache SSD shipments will grow more than a hundredfold by the end of 2015, up from less than one million units in 2011. Fueled by rising sales of ultrabooks, shipments of cache SSD units in 2012 are projected to reach 25.7 million units.

The DRAM market is "steadily deteriorating," agrees Clifford Leimbach, analyst for memory demand forecasting at IHS, listing a lack of global demand, less DRAM needed in new applications, a move away from incremental increases in DRAM for operating systems, and lacking capital expenditures at financially troubled DRAM players. Growth will come in a PC refresh cycle fueled by Windows 8, though this operating system has a lower DRAM requirement, Deutsche Bank notes. Mass-market smartphones also use mobile DRAM.

The capex drought for these companies have caused their manufacturing to lag behind, hurting their profitability. Newer DRAM chips manufactured using the most advanced process node technology yield higher profit margins than previous-generation chips and chips waiting in inventory, notes IHS. Deutsche Bank projects DRAM capex to be $6 billion for the year, down 16% from 2011, adding that most DRAM companies are projecting ~40% bit growth.

"The weakness in demand for DRAM chips in Q1 of 2012 continues, partially due to PC supply-chain disruptions caused by last summer’s flooding in Thailand, an increased consumer focus on mobility, and a weak global economy. Coupled with over-capacity and growing inventories, these factors are depressing the price for DRAM chips and undermining the ability of Taiwan’s fractured DRAM industry to remain profitable. Taiwan DRAM companies’ ability to maintain their debt repayment schedules has been crippled, and this will become an acute crisis in 2012. Moreover, this comes at a time of significant pressure from Samsung, which now commands over 40% of the global DRAM market, and which has received the go-ahead for a new fab in China. 2012 may very well be the year that a number of Taiwan’s DRAM producers finally close their doors," said Rupert Hammond-Chambers, president of the US-Taiwan Business Council.

IHS compares this inventory spike to the DRAM oversupply in 2008, and finds it shorter (6 quarters instead of 9). The present peak is also already higher than all of the data points in the previous cycle, except for Q1 2009; this cycle could surpass the last, IHS believes. Today’s oversupply is happening during the traditional peak sales season, and in an uncertain global economy. The DRAM inventory index could continue to rise for a few more quarters. DRAM revenue were just over $6 billion in Q4 2011, IHS reports, down 11% quarter-to-quarter. Many DRAM companies already operating at, or below, cash costs will see little relief. IHS’s prediction? "The worst is yet to come."

A combination of high debt burden and low cash flow will continue to plague DRAM customers in 2012, forecasts Deutsche Bank, which concurs with IHS’s expectations of low DRAM maker capex in the year ahead.

Heightened expectations for the economy as a whole could rapidly improve the DRAM prospects though, Leimbach said, citing this occurence in 2009, when the Inventory Index recovered from 14 weeks to 6 in just three quarters.

"Given that DRAM ASPs are near multi-year lows, with no sign of near-term recovery, we believe the tight cash situation will persist throughout 2012," concludes Deutsche Bank.

Table. DRAM capex as a portion of overal semiconductor capex. SOURCE: Deutsche Bank Securities Inc.
  2007 2008 2009 2010 2011E 2012E
DRAM ($M) 17,397 8,247 4,821 10,146 7,304 6,120
% change Y/Y 59% -53% -42% 110% -28% -16%
Total ($M) 50,050 33,529 21,644 43,097 51,752 44,685
% change Y/Y 8% -33% -35% 99% 20% -14%

Read the IHS iSuppli report "DRAM Inventory Stubbornly Continues to Rise" at http://www.isuppli.com/Memory-and-Storage/Pages/DRAM-Inventory-Stubbornly-Continues-to-Rise.aspx?PRX IHS (NYSE: IHS) provides information and insight on energy and power; design and supply chain; defense, risk and security; environmental, health and safety (EHS) and sustainability; country and industry forecasting; and commodities, pricing and cost.

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