DRAM may remain cheap for a long time

Sluggish DRAM prices are good for people interested in buying a new PC or adding memory to their laptop or desktop. PC vendors such as Dell and Acer often add more DRAM to new PCs when chip prices are low, and users can beef up an older PC by installing more DRAM on their own.

The current DRAM downturn will likely last more than a year and possibly two, said Simon Woo, memory chip analyst at Merrill Lynch, at a conference in Taipei Tuesday.

"It's longer than expected," he said, comparing it to the DRAM industry crunch of 1997-1998, which lasted nearly two years.

The current glut started around the middle of last year, but prices fell in earnest in the third quarter. The spot price of 1G-bit DDR2 (double data rate, second generation) chips that run at 667MHz fell to US$1.92 Wednesday, according to DRAMeXchange Technology, which operates a clearinghouse for the chips. Prices of the chips hit their third quarter high of $6.25 each on July 12 last year. The current price marks a decline of 69 percent since the third quarter high.

DRAM makers caused the current glut by building too many new factories in anticipation of strong DRAM demand for PCs armed with Microsoft's Vista OS. The OS requires 1G-byte of DRAM per PC to run well, compared to just 128M-bytes for Windows XP.

Vista didn't take off quite as DRAM makers had hoped, leaving the market awash in excess chips.

Huge price declines in the DRAM market caused Gartner to pare its global chip revenue growth forecasts for this year to just 3.4 percent, from a previous estimate of 6.2 percent. DRAM will fare much worse than the overall chip market, with revenue forecast to drop 15 percent this year to $54.9 billion, from $58.1 billion last year, the market researcher said.

Most analysts believe prices will bottom out in the second quarter because that's when PC demand is seasonally weakest. Most DRAM goes into PCs.

"We expect DRAM prices to fall another 10 percent in the second quarter of 2008 as PC DRAM content growth slows and inventory rebuilding ends," said Matt Evans, memory chip analyst at CLSA, in a report. He expects DRAM makers to cut spending on new production lines, which could spur a price recovery of as much as 10 percent in the third quarter.

Do Hoon Lee, memory chip analyst at Macquarie Securities, warns that second quarter DRAM price declines could be far worse than expected if DRAM makers unload inventory into the market. Macquarie expects many DRAM makers to put the construction of new factories on hold, a move that could boost DRAM prices a bit.

Product gluts in most industries normally cause companies to cut production until the market improves. But that's not the case in DRAM. DRAM makers cannot afford to cut back on production in part due to the global credit crunch, and also over the fear of losing market share. The global credit crunch means it's harder for companies to find new funding, so DRAM makers need to keep selling chips - even at cut-rate prices - to ensure a steady flow of cash to fund continuing operations.

The heavy cost of building new DRAM factories is also an issue. Such plants can cost up to $3 billion each, and companies normally run them 24 hours per day to get as much out of them as they can. DRAM technology advances so fast that companies have to constantly upgrade their production lines, costing them even more money. Since the technology on chip production lines loses its usefulness so fast and the value of the lines erodes quickly, chip makers are loathe to curtail production, even during market gluts.