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Memory market still likely to drop

A glut and the Asian currency devaluation are conspiring to keep prices near or even below manufacturing costs.

Late last month at an investor's conference, a cheer went up when it was announced that spot prices for 16-megabit memory chips had inched up from rock-bottom lows to $3.80. But now it appears that even this tenuous euphoria may have been short-lived.

A glut in chip supply and the devaluation of Asian currencies, among other factors, are conspiring to keep prices of 16-megabit and 64-megabit memory chip prices near or even below manufacturing costs. And although major manufacturers have announced that they are abandoning ongoing memory efforts (see related story), prices--and the industry as a whole--will not likely stabilize until the second half of the year, according to experts.

Chart of 16-megabit dram prices from 1994-97

The upshot: Prices may have inched up last month, but the underlying economic vectors still make for a very dismal picture.

Today, for instance, Dataquest revised forecasts to state that the memory market would probably only grow 7 percent in revenue this year, as opposed to earlier predictions of 17 percent growth. The culprits: slowing demand and lower manufacturing costs in Korea due to the economic crisis. The devaluation of the Korean won alone could account for $3 billion to $5 billion in lost DRAM (dynamic random access memory) revenue.

"Going into 1998, we see continuing overcapacity, forcing manufacturers to continue their efforts to keep prices low," said Jim Handy, memory analyst at Dataquest.

But, while this bodes ill for manufacturers, it continues to be good news for PC vendors and consumers, who are getting more memory for the dollar than ever before.

"Stock up on all the DRAM that you can. For Compaq, Dell, Apple this is a great time," commented Brian Matas, vice president of market research at IC Insights.

"For the first half of the year prices will stay flat, maybe even slide some more, but I don't see it going up. I've got to think it will get better in the second half."

A recent report from Mario Morales at International Data Corporation sheds light on the precarious nature of the memory market.

16-megabit DRAM prices had flattened to $2 in spot market prices and between $2.80 and $3.50 in the contract market at the end of the year. By January, contract prices came back to $3.80 to $4.25. The surge in prices resulted when manufacturing cutbacks were announced and Korean manufacturers stopped inventory sell-offs.

Despite the surge, IDC backed away from predicting a recovery. The higher prices may serve to only bring in more inventory into the market, which will send prices once again plummeting. The end of the fiscal year for Asian companies is also coming in March, which could prompt a blow-out of inventory.

Recovery in prices will likely begin to gradually occur, said Morales, but several factors will have to align for that to happen. Chip suppliers will have to continue to cut back on production and demand for DRAM has to continue to grow. Third, the computer industry has to be willing to make the transition to 64-megabit chips in the second quarter.

IDC believes that all suppliers are at or near that crisis point today," wrote Morales. "We caution that its too early to tell, especially with so many factors still unresolved."