Strong season unable to spur price growth amid high inventory; price trough to emerge again

Despite DRAM makers cut their capex by 40% YoY in FY08 after suffering losses from 2Q07, DRAM supply bit growth is still expected to grow by ~65% YoY, primarily driven by aggressive expansion at Samsung and Elpida. Thanks to a steep price cut, memory content per box is also expected to have a big boost. But when over half of the shipped PCs come with 2GB or above memory density, magnitude of growth in terms of memory density will slow down.

Since an price rally of DRAM ASP started earlier than expected in April (through late June), all OEMs who have built up their inventory at lower price either through long-term contracts or special deals, discouraged the price momentum thereafter. Therefore, DRAM contract price remained flat in July and drop by a respective 10% in 1H and 2H of August, which is the largest range in the past six months. Buyers have gained stronger price bargaining power from July amid a weak macroeconomic trend and conservative procurement among PC OEMs in 2H08. Most PC OEMs are having an inventory level of 6-8 weeks.

In addition to the negative impact from a high inventory level among OEMs, suppliers' aggressive expansion also constrains possibility for a sustainable price appreciation. Samsung that plans for a 90-100% DRAM bit growth is expected to suppress price growth at the contract market; whereas Rexchip (a Elipda-PSC JV)'s considerable output surge has also constrained spot price growth in 1H08.

Therefore, DRAM price only posted a short rally in 2Q but went down again thereafter. As the drop accelerates in pace, DRAM makers have found their expansion trail behind the drop. If they see no solution to prevent losses, they will also expose to stiff fund raising pressure on one hand, and bottleneck on 50nm on the other. Both operation fund and technology migration will encounter stiff challenges in FY09.

Sluggish demand spurs price cut among memory module houses

In the spot market, the benchmark DDR2 eTT 1Gb price hovered at US$1.70 level for several days last week, even certain buying had shown but not strong enough to create a short term price rally. Although no obvious supply was seen recently, demand remained sluggish and price kept going downward.

Since China government enacted strict security checks on transportation due to Beijing Olympics, the demand in China has slowed down for a while, which makes the players with high level of inventory suffer. Module price cut took place in the past two weeks by leading module brand in China. If the module price is converted into the price of chip, it is even lower than the spot chip price. This does cause downside pressure to the spot chip price.

Awaited for NAND Flash demand recovery during upcoming seasonal upturns

Demand for NAND Flash might have weaker expectation in 2H08, but a better sales recovery may be seen during the upcoming seasonal upturns as a sharp ASP slump may encourage consumption. Consumption of NAND Flash related product is being shadowed by the subprime woes, resulting in a weaker-than-expected sales growth in 2H08. But given that mainstream NAND Flash ASP has slumped by over 80% since 3Q07, a more favorable pricing stimulus thus is seen. It is expected demand recovery may be seen during the upcoming week-long holiday in China during early October, Thanksgiving Day and Christmas. Under an anticipation of better sales recovery, an oversupply in 3Q08 is also likely to improve toward a more balanced NAND Flash market in 4Q08. NAND Flash demand bit growth is estimated to grow 141% YoY at 30681mn Gb in 2008, down from the bit growth of 151% YoY in 2007.

NAND Flash pricing is likely to stabilize or post a mild bounce when traditional hot season demand gradually recovers after August. Buoyant sales of Apple 3G iPhone after its launch in mid July provide a positive sign for NAND Flash demand. When Hynix later announced to further trim its 2008 bit supply in late July, market sentiment thus being encouraged in the short term. Yet, loads of uncertainties still exist in the NAND Flash market in 4Q08, therefore, industry players are generally seeing a hazy demand visibility. Most buyers are being cautious over procurement in order to keep their inventory at healthy level.

Most NAND Flash makers are maintaining their 2008 bit growth target static, except for Hynix. The Korean chipmaker has revised down its 2008 bit growth output guidance from a 90-100% YoY growth to 50-60% YoY growth. Amid the change, NAND Flash supply bit growth is expected to be 146% YoY to 31919mn Gb in 2008, up mildly from the bit growth of 144% YoY in 2007. Oversupply is still going to loom the market in 2008.

Given that the NAND Flash market is expected to see oversupply & heavy price erosion in 2008 and uncertain macroeconomic factors in 2009, so far major NAND Flash makers have no concrete plan for their capacity expansion and capex in 2009 yet. Most are believed to maintain flexible to cope with any unexpected situation in the future. NAND Flash makers are also expected to accelerate their deployments in killer application – SSD. While establishing new industrial standards & performance comparison benchmarks for SSD, NAND Flash makers will also dedicate more efforts to develop advancedprocess technology & new architecture design for NAND Flash to deliver an enhanced Price/Performance ratio of NAND Flash and spread the influence to more diversified applications.

2H August NAND Flash contract price review

NAND Flash contract price of 2H August fell at the range between 0 to 13%. Market has so far expected demand driven by traditional peak season after August. Therefore, most buyers are more careful with purchasing in August. And this has relatively led to weaker market demand. Due to uncertain factors remained in 4Q08, market outlook for NAND Flash is more conservative with expectation after summer Olympic Games in China and back-to-school demand in Europe and the U.S. The price is likely to stabilize and gradually rebound as the traditional hot season stocking demand recovers.