Already besieged by low demand and bleak growth prospects, the market for dynamic random access memory (DRAM) is encountering yet another dispiriting obstacle—an alarming rise in inventory that threatens to further sink the industry, according to an IHS iSuppli DRAM Market Brief from information and analysis provider IHS.
The IHS iSuppli DRAM Inventory Index in the third quarter stood at 12.75 weeks. This represents a sharp 30.8 percent increase from 9.8 weeks in the second quarter, and more than double the 6.1 weeks seen during the first quarter of 2010, which marked a recent low point for DRAM inventory. It also is significantly higher than the long-term quarterly average of 9.23 weeks.
The DRAM Inventory Index measures the inventory value at the end of the quarter against the sales for the quarter. The index accounts for DRAM inventory held by the memory suppliers themselves, and not by DRAM buyers. A rise in the Inventory Index value means that there is more inventory being held by DRAM producers, putting downward pressure on chip prices.
The current scenario exacerbates the travails of the steadily deteriorating DRAM space, suf- fering from a multitude of market-depressing factors including the lack of worldwide demand, the arrival of new applications needing less DRAM, and operating systems that do not require an incre- mental increase in DRAM as previous versions did. The financial difficulties of a number of DRAM players also have prevented capital expenditure investment by those firms in more cost-effective processes, which could have improved the profitability of these companies. Margins on newer chips manufactured using the most advanced process node technology are higher than margins on previous generation chips newly produced or that have been sitting in inventory. With profits already razor- thin or negative, this disparity becomes even more pronounced.
The worrisome spike in the inventory index in the third quarter is reminiscent of the last DRAM oversupply situation in 2008, which coincided with the worldwide economic recession at that time. But while the circumstances from the past are recurring on some level at the present, they also are different in many ways.
For instance, the last upheaval occurred over a drawn-out period lasting nine quarters, while the level today from trough to current high has taken only six quarters. Also, the present peak is already higher than all of the data points in the previous cycle save for one—the previous apex, reached in the first quarter of 2009—and there is every possibility that this cycle could surpass the last, IHS believes.
Because DRAM is a cyclical market, such distressing patterns during what should be the tradi- tional high sales season are not comforting to producers of the memory type. And given the decid- edly uncertain state of the world economy, the DRAM inventory index could well continue upward for a few more quarters, worsening an already bad situation within the space.
In line with the gloomy state of the market, IHS iSuppli is forecasting DRAM revenue to slide to slightly more than $6 billion in the fourth quarter, down 11 percent from the third. Furthermore, it appears unlikely that the downward trend on operating profits will subside—which means that there will be little respite for the many DRAM companies already operating at, or below, cash costs. All told, the historical trajectory illustrates that the worst is yet to come.
A glimmer of hope can be perceived, however, in this murky atmosphere.
Should expectations arise that the economy might be headed for improvement—the belief alone is sufficient—things could rapidly improve for the better. An example of heightened expectations very quickly reversing the downward path of the DRAM market occurred in 2009, when the inven- tory index recovered from a beleaguered 14 weeks to a desirable six weeks in the space of just three quarters.
To be sure, the thought of a bright future would bring a dramatic turnaround and some much- needed relief for the DRAM industry. But as it currently stands—and unfortunately for the indus- try—there is little cause for optimism.
Learn More > DRAM Inventory Stubbornly Continues to Rise