Report: DRAM Oversupply, Freefalling Prices Expected In Second Half Of 2011

IHS expects the cost of the bellwether DRAM product - Double Data Rate 3 in the 2 gigabit density - to drop to $1.60 in the third quarter, down 66 percent from the third quarter last year. The report, issued last week, forecasted additional price reductions, to $1.25, in the fourth quarter.

Some systems builders say the price reduction offers little benefit to their business, because the typical PC already includes more DRAM than required. "We don't need more memory in our machines, so even though prices are really, really cheap I can't take advantage of it," said John Kistler, owner of J&B Technologies in St. Louis.

Mike Howard, principal analyst in the DRAM and memory group at IHS, agrees that the price reduction is unlikely to spur additional sales. "People aren't clamoring to get more DRAM into a machine. That's really a problem [for DRAM manufacturers] because typically you drop the price and people buy more, but now they don't need more," he said in an interview with CRN.

Howard attributed the pricing decline to a reduction in PC sales and the resulting oversupply of DRAM at many fabs around the world. In Taiwan, Nanya Technology Corp. throttled second quarter shipments only after it had 30 days of inventory, reflecting what Howard described as a lag between the front and back ends of the supply chain. "The lag is great when you have something happen like the earthquake in Japan, because you still have months of inventory, but not when you want to put on the breaks quickly," he said.

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Taiwanese manufactures often experience greater price strain than other OEMs because of higher manufacturing costs and more difficult market dynamics, Howard said. "The manufacturers in Taiwan are sort of behind because their manufacturing cost is higher and because of their product mix," he said. "They sell into the spot market where prices are the most cutthroat. The bigger guys tend to have a higher selling price." Howard added that Taiwanese manufacturers are those most likely to see DRAM prices close to cash cost - the cost of operating the business - in the fourth quarter.

Kistler thinks the price drop represents a decline in consumer confidence. "Memory prices are falling in direct relation with the drop in consumer confidence," he said. "Once you see the prices of components completely and totally fall apart, it tells you that end user demand is soft everywhere."

Meanwhile, research firms IDC and Gartner issued similar reports in July outlining the decline in PC sales across the U.S. in the second quarter of 2011. IDC pegged the decline at 4.2 percent year-over-year, while Gartner calculated a 5.6 percent decline from the same quarter in 2010.