PC memory prices soar

Memory prices have surged 50 percent and more in various markets in the last week amid a swirl of rumors that the supply is beginning to shrink. The price of 64-megabit memory chips has jumped to as high as $14 from $8 in spot markets, sources said. In May, the same chips were selling for $6.70, a record low.

Although the price hike is real, its cause is tough to pin down. Production problems at some manufacturers and cutbacks in memory module manufacturing are rumored to be the cause, according to some sources.

Other possible, more factual, contributing factors: a nationwide electricity grid blackout in Taiwan earlier this summer that caused plant shut-downs, a transition to higher-capacity chips, and increased demand because of higher-than-expected PC sales.

This week's spike follows a less dramatic, though fairly constant, rise in memory chip prices since June.

Kingston Technology, a major reseller of modules and chips, confirmed this trend. "This is happening on a daily basis now," said Lisa Dreher, a memory product manager at Kingston.

The prices for DRAM, the most widely used memory chip in personal computers, have been on a roller coaster ride over the last 12 months.

After years of a price free-fall and periods when manufacturers sold products below costs, memory prices began to inch up in the beginning of 1999. In March, Micron Technology reported a jump in earnings for the first time in a year, partly due to a rise in prices. Then, prices plunged again in May on the spot market.

Since June prices have been on a slow but steady upward climb, punctuated by a surge in the last week.

The hikes, if sustained, have numerous implications. Because memory is one of the main components in a PC, price spikes can drive up PC prices. Moreover, memory manufacturers, which had been in the doldrums, could see a rise in earnings and stock prices. Micron Technology's stock, for example, has more than doubled in value since June and is now trading at about 75.

At Crucial Technology, the memory chip selling arm of Micron, prices for 64-megabit chips have leaped from $8 last week to between $12 and $14, according to a corporate sales representative. The 64-megabit variety of DRAM is used to build modules, which are the small circuit boards used for connecting memory to a PC. These modules are typically sold in quantities of 32, 64, and 128 megabytes (MB). In short, megabit refers to the chips themselves and megabytes, the modules.

The big why
Kingston's Dreher cited a July electrical grid blackout in Taiwan as a factor in the price rise, stating that supply was affected by as much as two percent at that time. She also said that severe supply constraints in the market for flash memory--used in cell phones and digital cameras--is causing a scare in the DRAM segment.

Other manufacturers and analysts contacted today also noted the blackout and a rumor that Micron was having trouble with production yields as it transitions from 64-megabit to 128-megabit chips, causing panic buying.

Micron disagrees. "We're not having production yield problems," said Bob Clark of Micron's investor relations department. But he added that "when you move from one [production] process to another it takes time for the next process to mature. This is not at all unusual."

Micron is one of largest memory chip manufacturers in the world and the largest in the United States. It bought Texas Instrument's memory chip business last year.

"This kind of rumor causes a mentality which increases buying," said to Mark Guidici, an analyst at Dataquest. "Such and such company is maxed [on production]. This gets spread around the purchasing community."

He had also heard that Micron had "lost some yield" but countered by noting that there is a significant gap between market perception and reality in one sense. Because makers are doubling the "bit per [semiconductor] wafer" by moving from 64-megabit to 128-megabit chips, there will be more than enough supply to meet demand. "Demand cannot keep up with the multiplying bit supply," he said.

He also cautioned that the spot market, where this pricing action occurs, "is the most volatile electronics market around." Indeed, Micron said that this kind of price volatility is not representative of the entire market. About 70 percent of its business is in the contract market--where the largest PC makers buy--and only 30 percent in the spot market, according to Clark. "The contract market lags the spot market and there isn't as much volume," he said

On the other hand, Dataquest's Guidici said that PC sales are going "to be very strong in the third quarter" when the numbers come out, meaning more demand for memory chips. This is on top of statements from Toshiba, one of the top five makers worldwide, that it would cut back drastically on the production of 64-megabit chips and from IBM about getting out of the commercial DRAM business.

Hitachi is representative of a trend at Japanese makers to get of out of the mainstream 64-megabit DRAM market. Though the company still makes the 64-megabit variety, it is concentrating on pricey 256-megabit chips that are used in severs, according to Ron Bechtolds, a vice president at Hitachi Semiconductor America.

He has also seen a number of factors conspiring to drive up prices of the standard 64-megabit chips. Just as memory makers began to transition from 64-megabit to 128-megabit, low-cost PC makers upped the amount of memory standard in PCs from 32MB to 64MB, crimping supply, he said. "You have 2X demand now. A desire [by PC makers] to build inventory, plus the existing demand that's out there already."