Memory prices declining, but shortage isn't over yet

Prices for dynamic random access memory, or DRAM, chips have taken an unexpected slide in recent weeks because of sluggish PC purchasing. Micron Technology, which is expected to report earnings of 96 cents a share later today, has been selling 64-megabit DRAM in the wholesale or "contract" market for $7.50, or 50 cents less than the week before, according to a report from Merrill Lynch's Joe Osha. In August, Micron's contract price was between $8 and $8.40, Micron executives said at a Bank of America conference in late September.

Meanwhile, Samsung dropped its contract prices, the prices that large PC makers pay, to the low $8 range, while Hitachi sent DRAM down to the mid-$7 range.

Despite the downturn, however, the industry remains mired in a manufacturing capacity shortfall that likely will not disappear for another year, barring an economic downturn. PC demand may have slowed for now, but it still outpaces the ability of chipmakers to consistently produce DRAM or other components such as flash memory.

"It is likely that the flash market will be tight until 2002, while the DRAM market will be firm until 2003," said Jim Handy, an analyst at Dataquest. Right now, however, there is an oversupply "that should be short-lived," he said.

The recent price declines stem largely from slower-than-expected PC demand in what has turned out to be a hard-to-read year for the high-tech industry. DRAM prices move fairly fluidly. In the beginning of the year, some analysts predicted memory prices would be rising by now with the seasonal uptick in computer buying.

Instead, prices went the other way.

"Our indication is that box demand is down," said Jim Sogas, director of the DRAM business unit at Hitachi. "It is a little bit of a surprise. This is usually the strongest part of the year. Even in a soft period, September and October are always the good months."

Dataquest's Handy added that unusual buying patterns have helped confound projections. In the first and second quarters, computer makers began to stock up on memory to avoid a crunch in the fall. These stockpiles became excess inventory that needed to be moved when PC demand failed to materialize as expected.

Chip manufacturers have continued to tweak their operations to increase production volumes, he added.

"The DRAM thing is a little bit of a complex issue," he said. Memory prices will likely once again track up, or at least level off, if demand picks up as usual in the fourth quarter.

Despite demand fluctuations, the industry is still short on factory capacity. Typically, the total number of DRAM bits, or memory cells, produced by the industry grows by 80 percent annually. Flash memory, which is used to store data and programs in cell phones and other devices, grows 100 percent annually, in terms of bits. To hit those numbers, expansion is needed.

"The number of wafers going into DRAM production don't get you to bit growth north of 80 percent," said Osha.

Not everyone agrees, however. In the DRAM market, "we're kind of right on the brink of moving from somewhat of a shortage to an oversupply situation," said Brian Matas, an analyst with IC Insights. Samsung and other manufacturers will boost capacity next year, which will dampen prices.

"A few of the manufacturers are a little surprised that it (the price) hasn't gone higher," he added.

In addition, an economic slowdown could easily change the picture, said Osha. "If we are going to have a no-fooling-around recession, the cycle could end."