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Memory prices to slump below production costs

Memory chip prices are expected to fall 30 percent or more by mid-year to below the manufacturing cost.
/ Source: Reuters

Memory chip prices are expected to slide 30 percent or more by mid-year to below the manufacturing cost as chip makers plough generous 2004 profits into new production lines, exacerbating a surplus of supplies.

But analysts expect prices to stabilize in the second half as production switches over to the next generation of dynamic random access memory (DRAM).

DRAM supply will outpace demand by 2 percent to 3 percent in 2005, said Jae H. Lee, analyst at Daiwa Institute of Research in Seoul.

"We project DRAM prices to weaken further and possibly hit bottom in the second quarter, before experiencing a short price rally in the third quarter," he said.

Lee forecast benchmark prices would hit $2.60 in the second quarter, below the $3 price that typically marks break-even for chip makers.

That would leave chip makers such as Samsung Electronics Co. Ltd., Micron Technology Inc., Infineon Technologies AG and Hynix Semiconductor Inc. facing losses, though bigger, more efficient companies will suffer less.

The boom-and-bust DRAM business enjoyed a strong 2004, with the price of benchmark 256 megabit DDR (double data rate) DRAM hitting highs above $6 per unit in April before easing to an average of $4.52 in the fourth quarter and around $3.70 in recent days.

Lee said the industry was funneling remarkably strong cashflow generated in 2004 into new capacity.

Flush with cash
In one example of the sector's change in fortunes, top Taiwan DRAM maker Powerchip Semiconductor Corp. is expected to post $69 million in 2004 net profit, according to analyst forecasts compiled by Reuters Estimates, after a mere $5.3 million profit in 2003.

Flush with cash, the company filled a plant making chips from advanced 12-inch, or 300 mm, silicon wafers with equipment last year and began construction on another.

Electronics giant Samsung, the world's largest DRAM maker, also said this week it would spend some $940 million to boost memory chip output this year.

And Japan's Elpida Memory Inc. is putting $1 billion it raised from its November stock market listing toward an aggressive capacity expansion plan. A new chip line typically costs about $2 billion.

With growing capacity outstripping lacklustre demand due to stagnant PC sales, ABN-AMRO analyst Crystal Lee said she saw DRAM prices falling to an average of $3 in the first quarter.

"It will drop about 30 percent compared to the fourth quarter (average) and then another 20 percent in the second quarter," Lee said.

However, she expected a switch to a new DRAM chip called DDR2 to brake the price side in the second half.

DDR2 offers faster speeds for data transfer and lower power consumption, but personal computer firms have shunned the technology because of a lack of compatible chipsets to link the new memory to a computer's microprocessor brain.

Supply has anyway been limited as chip firms work out production kinks, but analysts and industry insiders expect the technology to become mainstream this year as chipsets arrive and start-up problems ease.

"Falling DRAM prices will force DRAM makers to more aggressively convert capacity from DDR to DDR2," said Yu Chang-eyun, analyst at BNP Paribas Peregrine.

"Samsung will be the largest beneficiary of the trend as the company has DDR2 products ready and currently controls about half of the market," he added.

However, a semiconductor trader at the Korean electronics giant estimated Samsung's share of the DDR2 market would fall to about 33-35 percent by the end of the year as other microchip makers get into the game.

"We estimate DDR2 to account for about 55-60 percent of total DRAM shipments by the fourth quarter of 2005 versus 15 percent a year ago," the trader said, referring to shipments by all DRAM makers.