DRAMeXchange wonders if DRAM prices will bottom out soon:
Current market observations show the DDR2 chip price possibly bottoming out. If this occurs, it should drive up the chip demand, and spur a rebound in the spot price.
Memory chips were the last domino to fall, so to speak, to the oversupply situation. As such, I would expect them to be the last to recover. The quote above, that demand will rise because prices stop falling, appears counterintuitive at first. Perhaps the suggestion is that buyers were putting off purchases on the expectation that prices would be lower if they waited. I can’t really buy that argument, though, because I don’t think PC makers and other DRAM users would worry about the price if they had their own end demand – they would just buy what they needed and pass along the higher price to whatever extent possible.
In fact, quite the opposite likely occurred. For example, for several quarters Hewlett Packard (HPQ - Annual Report) has been making “strategic buys” of inventory they already thought was excessively cheap.
So while the “bottoming out” is not likely to spur demand, it may well spur a reduction in supply. The same DRAMeXchange report hints at that as well:
Despite the fact that Taiwan DRAM makers posted a gross profit of nearly 50% in 4Q06, and 30% in 1Q07, DRAMeXchange believes the persisting DRAM price declines in May will cause them to post a loss in 2Q07.
Although DRAM makers must still ship their chips in May, they indicated no additional price cuts would be made, due to the continuing losses. Prices have thus started to increase for last week. Yet, the end market demand is not expected to pick up in May and June, and PC shipments have been performing worse than expected in May, in the wake of a weak seasonality. Furthermore, PC OEMs, major spot market buyers, and module houses still have inventory levels lasting for more than a month. DRAMeXchange believes that by only relying on buyers in purchasing cheaper chips, the DRAM price increase will be limited at least before June.
With prices already dangerously low, Hynix has already started to switch some of its DRAM production to NAND Flash instead.
With capacity being shifted to other products, and the profitability issues impacting the ability to invest in more capacity (as long as the companies heed the signs) the lower supply is what will allow demand to catch up and restore equilibrium to the market.