iSuppli upgrades DRAM market rating to positive

EL SEGUNDO: Amid a shortage of DDR3 memory and a resulting rise in pricing, iSuppli Corp. has upgraded its rating of near-term conditions for DRAM suppliers to positive.

iSuppli had maintained its negative rating since September 2008 until it upgraded the condition to neutral two weeks ago.

“The improvement in circumstances is a welcome relief to a DRAM market that has been stuck in a state of oversupply for nearly three years,” said Nam Hyung Kim, chief analyst for iSuppli.

“The oversupply has been a disaster for the global DRAM industry, with revenue dropping to $23.6 billion in 2008, down from $34 billion in 2006,” Kim said. During this period, the profitability of DRAM suppliers evaporated completely, and the combined operating loss for the entire DRAM industry amounted to $15 billion during the last three years.

Kim added: “With rising demand and limited supply for DDR3, the global DRAM industry is set for a sustainable recovery that will extend into the fourth quarter and pave the way for a robust annual increase in 2010.”

DRAM revenue plunged by 19.5 percent in the first quarter compared to the fourth quarter of 2008. However, with the rise in DRAM pricing, revenue increased by 37.5 percent in the second quarter compared to the first. Revenue is set to continue to rise on a sequential basis by more than 20 percent each in the third and fourth quarters.

The figure presents iSuppli’s worldwide quarterly revenue growth forecast for DRAM.Source: iSuppli, July 2009

Kim this month visited Asia where DRAM suppliers confirmed the DDR3 shortage. The suppliers reported PC OEMs are making a rapid shift from DDR2 DRAM, which has been the industry standard for nearly three years, to DDR3 because of its high performance and low power usage.

However, suppliers have not yet ramped up production of DDR3 enough to meet this new demand. DDR3 captured only 8.4 percent of total bit shipment in the first quarter of this year and is expected to reach 15 percent of total bit shipment in the second quarter, based on iSuppli’s preliminary data.

iSuppli predicts the DDR3 shortage will persist during the third quarter because suppliers won’t be able to meet current demand. While the limited investment of DRAM suppliers is slowing their 50nm migration—a process necessary to ramp up DDR3 production quickly—the DDR3 shortage will cause supplies of DDR2 to tighten as Tier-One suppliers continue to convert production from DDR2 to DDR3.

Nevertheless, if DDR2 prices rise, suppliers in Taiwan are likely to increase their utilization rates, limiting price increases. Thus, depending on Taiwanese suppliers, a recovery in DDR2 prices could be limited, widening the price gap between DDR2 and DDR3.

The price crossover between DDR2 and DDR3 is expected to arrive near the end of the year or in early 2010 when DDR3 volume rises to be equal with DDR2’s.

While the DDR3 shortage and the improvement in market conditions are positive developments for suppliers, they represent bad news for PC OEMs and other DRAM buyers.

“Prices are rising in the third quarter, a time when DRAM buyers typically begin to make purchases for the holiday season,” Kim noted. “Adding to the current tight supply for notebook LCD panels, the increase in DRAM prices will result in lower profitability for the PC makers in the second half of the year.”