4GB contract price trend stays strong in 1HFeb., Elpida's potential industry withdrawal would have severe negative impact

TAIWAN: According to DRAMeXchange, a research division of TrendForce, although the 2GB DRAM contract price stayed flat in 1HFeb., highest price did not exceed $9.5. However, many deals were concluded at higher price ranges, and highest 4GB module price jumped from $17.25 in 2HJan. to $18 in 1HFeb. ASP, and lowest price also increased, from $16.5 and $16 to $17.5 and $17, respectively. The majority of deals fell between ASP and highest price, indicating the likelihood of further increases in the short term.

However, the spot and contract price trends are not showing similar developments. Purchasing desire is somewhat weak, and PC OEMs are mostly turning to the contract market for inventory at the moment, in hopes of securing large-volume deals. Therefore, falling by 5.32 percent since Chinese New Year, DDR3 2Gb chip ASP arrived at $0.89 today, gradually closing the gap on contract chip ASP of $0.94. This is enough to indicate that the current DRAM market is not reliant on demand – supply-end capacity adjustments are the key to maintaining supply and demand balance.

PC DRAM ASP has been atypically strong in the first quarter of the year, mainly due to the effects of capacity cuts made in 4Q11. Although demand has remained weak in 1Q12, disciplined limitation of production on the supply end has had a positive impact on the contract price trend. Price stabilized in January, and has begun to increase notably in February. This development has undoubtedly taken DRAM manufacturers, most of whom are deep in the red, by surprise.

The contract price trend will continue to see strong momentum in the short term, but 2Q price will depend on suppliers’ self-restraint when it comes to production levels. Looking farther ahead, after the upcoming short-term fluctuations, due to the traditional strong PC sales season and commercial upgrades that have not occurred in a while, 2H12 will see increased demand that will benefit the stabilization of the PC DRAM price trend.

Wafer start volume to recover in 1Q12, market demand mainly stimulated by Win8, ultrabook, and commercial upgrades
After contract price stabilized and bottomed out last December, market sentiment turned optimistic, especially as prior capacity cuts began to take effect. Contract price began to rise gradually in January and increased significantly in 1HFeb.

Due to the price stabilization and the fact that 2H12 PC market demand is forecasted to be stronger than last year, global DRAM makers will increase capacity slightly, by 20K starts per month, while Taiwanese manufacturers will add nearly 80K starts per month, for a total increase of 100K starts per month.

According to TrendForce statistics, as capacity is readjusted, forecasted DRAM industry growth for 2012 is also adjusted, from 21 percent YoY to 30 percent YoY. However, product mixes have changed – DRAM makers are all aggressively transitioning from commodity DRAM to mobile and server DRAM production. Commodity DRAM accounts for 49 percent of total DRAM output, down from 53 percent in 2011, marking the first time the commodity DRAM ratio has fallen below the 50 percent mark. As commodity DRAM is unprofitable, reducing output will undoubtedly benefit price recovery.

On the demand side, as the impact of the Thailand flood disaster on the HDD supply chain has subsided in 1Q12, PC OEMs will increase PC shipment volume for back-to-school demand in 2Q. As for commercial upgrades, due to the impact of the 2008 financial crisis and the fact that Win7 did not result in a significant number of upgrades, commercial users have not upgraded in at least four years. This has gradually had an effect on corporate efficiency, and there is a chance for a wave of commercial upgrades in 2H12 as Win8 and a $700 ultrabook hits the market. Commercial upgrades would benefit the DRAM market supply and demand balance, helping the market head towards a healthier state.Source: DRAMeXchange, Taiwan.

Elpida’s potential withdrawal from DRAM industry to severely impact PC and DRAM industries
Recently, Elpida’s financial status and their uncertain future has been a focus of the market. This April, Elpida must repay the nearly JPY$40 billion government loan as well as JPY$80 billion in short-term bank loans. Besides negotiating with the Japanese government and other creditors, Elpida is searching for any financial source that would help the company survive. As for long-term solutions, talks of alliance with Micron or Toshiba are still in discussion.

In the meantime, Elpida is looking to other manufacturers for short-term funds. Currently, a few makers have agreed to provide varying amounts of financial assistance to help Elpida through this life or death situation.

Looking at Elpida’s process technology, the manufacturer’s situation is different from Qimonda’s, the maker that announced bankruptcy in early 2009. Qimonda was struggling technologically as well as financially – the maker had hit a bottleneck with trench technology which left them far behind their competitors. Losses increased, and in the end Qimonda had no choice but to file for bankruptcy.

Elpida, on the other hand, has already entered 30nm mass production for commodity DRAM, and will begin test production on the 25nm process in 2Q12. As for mobile DRAM, the maker is already on the 30nm class. Elpida’s product quality has long since been acknowledged by global manufacturers, and their technology is nearing that of first-tier Korean makers.

As for 4Q11 market share, Elpida’s commodity and mobile DRAM account for 12 percent and 17 percent of the global market, respectively. If the Japanese government does not step in to offer assistance and Elpida backs out from the DRAM industry due to financial difficulties, the negative impact on the PC and DRAM markets will be severe.

DRAM market share will be even more unbalanced, dominated by makers with leading technology. The DRAM market will be one step closer to an oligopolistic state, thereby leaving PC OEMs with less buying power.