Over 7 percent decrease in DRAM average contract price for 1H July, 4GB contract price approaches $30

TAIWAN: According to DRAMeXchange, a research division of TrendForce corp., the contract price for 1H July is again showing signs of a downward trend. Average contract price for DDR3 2GB and 4GB is $16 (1Gb $0.84) and $31 (2Gb $1.78) respectively, down by 7.25 percent and 7.46 percent, quickly approaching the lowest price reached during the global financial crisis.

From the market perspective, as a result of the March earthquake in Japan, PC-OEMs increased their inventory levels in order to take precautions against potential supply chain disruption, which in turn resulted in a contract price high of $19 in May. However, global PC shipment volumes for the second half of the year will be conservative, with all PC-OEMs lowering their target shipment volumes, to the extent that some of them canceled their original orders for June in order to make a downward adjustment for approximately four to six week stock levels.

As demand from PC-OEM clients is not high and DRAM manufacturers are pressured to clear their inventories, contract price is being driven by buyers, thus 1HJuly contract price has fallen to the low of $15.5, and the downward trend is expected to continue for 2H July.

DRAM contract price continues to fall, DRAM manufacturers likely to decrease production levels
The last time DRAM manufacturers reduced output was during global financial crisis of 2009, when DDR3 1Gb spot price dipped below the material cost at $0.6. In order to conserve on cash outflow, DRAM manufacturers decreased their production levels and global output saw a decline of over 32 percent.

Taiwanese DRAM manufacturers led the pack, reducing output by over 50 percent. With the gradual economic recovery during 2H09 and Windows 7’s arrival on the market, DDR3 1Gb price rose to a high of $2.72. DRAM manufacturers were optimistic about the economic recovery, heading towards the adoption of sub-50nm manufacturing processes. Since next-generation manufacturing technology required costly immersion scanners, the 2010 CAPEX from DRAM manufacturers worldwide reached $11.9 billion, an increase of 174 percent from 2009.

While DRAM manufacturers did not subsequently increase their capacity, in order to raise bit growth levels, manufacturers all accelerated technology migration as if involved in an arms race. In past years a new generation of technology was adopted about every two years, but in the two years following the global financial crisis, manufacturers have already cycled through two, even three generations and arrived at the 3xnm process.

Bit growth is at a 250 percent increase compared to the mainstream 60nm process prior to the financial crisis, and Samsung may even unveil a 20nm process during 2H11. However, as PC shipment volumes and content per box did not grow at the same rate as DRAM, DRAM spot price began to decrease again in May 2010, arriving at the current DDR3 2GB contract price, which is approaching the lowest price reached during the financial crisis.

However, because of improvements in the manufacturing process and the fact that 2Gb chips have become the mainstream of the market, while the selling price has not yet reached the material cost, it has already touched the cash cost. Makers will likely end up with only a year before the price becomes unfavorable. In comparison, they had three years in their favor in the previous cycle.

Since most DRAM manufacturers’ financial status and cash positions have not recovered to pre-financial crisis levels, the planned reduction in chip production will happen sooner than before.

Given that PC shipments for the second half of the year will be lower than previously expected, content per box has not had any notable increase, and there are lingering concerns about the current economic recession, DRAM manufacturers need not wait until material cost has been reached – once cash cost has been broken, manufacturers are likely to adopt appropriate measures to prevent further losses. DRAMeXchange is foreseeing an increasing possibility of production cuts by DRAM manufacturers.