The Hynix fire and memory prices: What you need to know

There's nothing like an accident to drive up prices, but in this case, it's not necessarily gouging by greedy memory makers.

On September 4, there was some kind of disaster at SK Hynix's Wuxi manufacturing plant in China. Just what it was, we don't know. Hynix will not say officially what happened. It's sort-of like in "Star Trek VI: The Undiscovered Country," when the Klingon moon of Praxis was obliterated and the Klingons referred to it as "an incident."

First, Hynix said there was no damage. A few days later, it said one fab will re-open shortly but a second is still being evaluated and offered no time frame. "I expect the third report will be that the situation is even worse," commented Jim Handy, principle analyst with Objective Analysis, who follows the memory market.

The closest we've seen to actual details is a report comes from DRAMeXchange, a market research firm that follows memory manufacturers based in Taipei, China. It reports that fire, smoke and power outages have damaged or reduced the capacity of half of the equipment in the plant, even with its design that isolates the different areas.

The fire is said to have originated from the Chemical Vapor Deposition (CVD) machinery. Handy said it was likely a chemical called silane, using in the making of chips, that will ignite if it contacts air. In addition to the fire, a lot of areas were contaminated and will take a long time to clean. Remember, this stuff is made in clean rooms where not so much as a speck of dust can be allowed.

So there is no clear date for when the plant will return to full capacity. It could take anywhere from three to six months and up to a year in the worst case scenario, and reduce total output by two months’ worth of production at that plant or more.

The real problem is that the explosion/fire/whatever came just as the memory industry was going into a predicted shortage that would have reduced supply and raise prices anyway. Handy has been projecting this slowdown to last from about now until 2015, when new capacity comes online to make more chips.

The shortage might have been tolerable because there might be a three to four percent shortage in demand vs. supply. But Hynix is a major player. It produces 30% of the memory chips in the world, second only to Samsung. That plant in China is thought to produce 10% of the world's memory.

Handy estimates that with the China plant out of commission, there could be a loss of up to five percent of worldwide chip supply, on top of the 3-4% we were going to lose anyway due to increased demand and not enough capacity.

The result has been a major run-up in memory. As part of its report, DRAMeXchange said that memory prices have spiked 27% since the fire. While this looks like the typical gouging that takes place at the gas station every time there's a problem in the Middle East, Handy said that's not the case here.

"There's a lot of panic buying going on. That always forces markets higher. If people are panicking then those who have more to sell are basically auctioning it off to the highest bidder," he said.

What that means is major vendors like Apple and Samsung and HP will still get their supplies, but smaller, second- and third-tier players will be left wanting. "If they are buyers, they need to get into long-term agreements where they don't have one, sooner rather than later," said Handy.

What's most likely to happen with this incident is prices will ratchet up to a certain level and stay there throughout the shortage in 2015, he said. Objective Analysis predicts that whatever the prices are at the onset of the shortage when it finally does kick in will stay there until 2015.

"Nobody is going to lose money by buying memory now. Prices are not going to come down," said Handy.

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