As inventory levels fall so DRAM pricing strengthens

Declining stockpiles of DRAM indicate that supply is coming into better balance with demand, resulting in stabilization of pricing.

“The latest drop in the Inventory Index is due primarily to an aggressive stockpile burn-off from Japanese supplier Elpida Memory, which declared bankruptcy in February,” said Clifford Leimbach, analyst for memory demand forecasting at IHS. “The action taken by Elpida is a one-time event unlikely to be repeated. Even so, the reduction in stockpiles in early 2012 means that pricing should continue to strengthen in the second half of the year.”

Average pricing for DRAM in the 1 gigabit-equivalent density is preliminarily estimated to have risen by 1.5 percent in the second quarter, and is then set to climb by 7.7 percent and 3.5 percent in the third and fourth quarters, respectively. This follows sharp declines of 24 percent and 12.4 percent in the third and fourth quarters of 2011, as well as a 5.9 percent decrease in the first quarter of 2012.

Inventory in the first quarter could have declined to even lower levels were it not for the elevated DRAM stockpiles of two of the largest DRAM players. SK Hynix Semiconductor of South Korea and U.S.- based Micron Technology saw a modest 15 percent and 8 percent rise, respectively, in their inventories during the period, putting upward pressure on the index value that also prevented the drop from being larger in the first quarter.

Still, the inhibiting effect of SK Hynix and Micron should not be construed as a negative, IHS believes, because there is strong feeling throughout the industry that the DRAM average selling price (ASP) will strengthen in the second half of this year. Renewed optimism for PCs spurred by Ultrabooks, and the impending release of Windows 8, could translate into strengthened DRAM demand, bringing supply and demand into closer balance. And as DRAM prices rise because of these market forces, SK Hynix and Micron could be well-positioned to take advantage and sell the inventory that they have built up.

Such favourable conditions point to a stronger DRAM market during the next few quarters and mean that the index will continue to decline. DRAM firms appear to be comfortable with their inventory levels overall, positioning themselves to reap the rewards of an expected increase in demand during the succeeding quarters.

Despite the positive step forward for the market, the DRAM Inventory Index in the first quarter remained elevated above the 9.0 weeks recorded the same time a year earlier in the first quarter of 2011.

Furthermore, the index during the last four quarters has been above the long-term average of 9.5 weeks.

Anything exceeding this threshold is considered undesirable because it indicates high inventories and weak DRAM demand. And with DRAM prices on the retreat, holding onto inventory costs money for firms as they are unable to sell product immediately for revenue.

IHS iSuppli

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