iSuppli downgrades memory market rating

Oversupply and plunging prices for DRAM and NAND flash have prompted iSuppli Corp. to downgrade its rating of near-term conditions for suppliers of such components to "negative," down from the "neutral" assessment the company has maintained since late March for NAND and since July for DRAM.

The Global Average Selling Price (ASP) for 512Mbit equivalent density NAND flash is expected to decline to 46 cents in the fourth quarter, down a double-digit 24 percent margin from 60 cents in the third quarter. In contrast, the 512Mbit NAND ASP increased by 8.4 percent in the third quarter and by 6 percent in the second quarter.

The attached figure presents iSuppli's quarterly NAND ASP estimate at the 512Mbit equivalent density in 2007.

The decline in NAND pricing confirms iSuppli's forecast from summer that conditions would take a turn for the worse in the fourth quarter.

"The major cause of the price decline is a continuing oversupply of parts," said Nam Hyung Kim, director and chief analyst for memory ICs and storage systems at iSuppli. "The oversupply is being caused mainly by the South Korean memory manufacturers shifting production capacity from DRAM to NAND.

"The present weak conditions in the NAND market contrast markedly with the strong performance posted in the third quarter," Kim added. "Suppliers enjoyed a period of strong pricing in the third quarter. However, prices rose mainly due to reduced supply growth—not because of increased demand. iSuppli foresees no near-term recovery in NAND conditions, as the holiday build season draws to a close and sales stimulated by Christmas demand wane."

DRAM down in the dumps
About the only good thing to say about the DRAM market right now is that it couldn't get much worse. Poorer-than-expected third-quarter earnings results and slower-than-anticipated seasonal demand this month prompted iSuppli to downgrade the near-term DRAM market condition for suppliers to negative as well.

Market prices since September have been deteriorating and have fallen to less than cash costs. Pricing for 512Mbit density Double Data Rate 2 (DDR2) DRAM has been collapsing. In the Asia spot market, the prices declined to less than $1 this week. This likely will result in most DRAM suppliers posting losses in the fourth quarter. The DRAM industry's average operating profitability is expected to continue to be negative in the first quarter of 2008. This means the market will record four consecutive negative quarters on an average basis.

DRAM conditions to improve next year
While negativity rules the day in the memory market, iSuppli cautiously is predicting market conditions will slowly improve during the next few quarters.

DRAM will recover first, allowing most suppliers to achieve an operating profit in the second quarter of 2008. However, NAND market conditions will deteriorate through the second quarter, before undergoing a recovery in the third quarter. This means that profitability of NAND will continue to decline until the second quarter of 2008, resulting in a margin cross-over between DRAM and NAND in late second quarter next year.

"The DRAM recovery will be driven by the supply side, with inventory dwindling and growth in bit production decreasing," Kim said. "This will cause availability to tighten and prices to rise. However, this scenario assumes suppliers' behavior will be rational, and they will not engage in any massive production increases that could send DRAM pricing into a new dive. Any irrationality could drag out the market recovery."

With DRAM recovering more quickly than NAND next year, conditions in the memory market are exactly the opposite as they were in the fourth quarter of 2006. In the fourth quarter of 2006, strong DRAM profitability prompted suppliers to ramp up production aggressively. This resulted in lower NAND production and rising prices, causing a market turnaround in the second quarter of this year, before a slight DRAM recovery in the third quarter.

To find out more about the DRAM market see Kim's latest report entitled: September Price Drops Seal Fate of a Disappointing Q3 for DRAM.

For more information on this report, please visit: http://www.isuppli.com/catalog/detail.asp?id=8594