The prices of the memory chips that make our digital world tick soar when times are good plummet when boom turns to bust. The industry has been booming since early 2016, but while many now forecast a downcycle lasting up to two years, we think we’ll see only a mid-cycle correction, not the end of the super-cycle.
The current boom is the longest upcycle since 1990-95 when personal-computer sales led to a five-year chip shortage that caused DRAM prices to rise sharply.
This time the key issue is supply. Companies have splurged on capital expenditure but the efficiency of the investments has deteriorated. A delay in the commercialisation of extra-ultra-violet light source-based lithography equipment dried up output growth, leading to a supply shortage. Prices jumped for DRAM and NAND, the second most commonly used memory chip.
But demand increased too: the trend to IT outsourcing and the proliferation of mobile applications and games boosted interest in cloud services, raising sales of the servers used in data centres.
NAND prices started falling sharply in 2018 with fears that DRAM will follow, causing another long downcycle as extra-ultra-violet technology is adopted from 2020 and increased memory production by Chinese competitors leads to severe oversupply.
However, we believe the improvements in extra-ultra-violet efficiency will take until 2022 and prove expensive. And while Beijing is devoting resources to memory production, we still expect it to take at least another five years for Chinese newcomers to start contemporary DRAM production. Further, the technical transition to extra-ultra-violet light source will raise the entry barriers significantly with chip-design and process development also delaying production.
So we believe the decline in memory prices will be milder and shorter than the market expects, with prices recovering during 2019. We expect DRAM makers to show unusual discipline on capital expenditure: after a 33 per cent increase in 2017 and 71 per cent in 2018, we forecast a 25 per cent decline in 2019.
The industry has seen big structural changes. The 11 DRAM companies competing 20 years ago have been reduced to just three and competition is less cut-throat.
We now expect DRAM prices to fall 20 per cent in 2019 – much less than during previous downcycles when they declined between 35 per cent and 76 per cent. And with NAND makers also now showing spending discipline, those prices should start to stabilise by mid-year as content demand rises.
The decline in memory prices should thus be shallower and shorter than before. The new DRAM capacity has created an oversupply that will cause a 20 per cent drop in prices in 2019, on our forecasts, but demand will start to recover mid-year.
NAND prices, down 39 per cent in the first 10 months of 2018, are expected to fall another 35 per cent in 2019. However, by the second quarter content demand should recover and investment cuts will start affecting capacity. So we believe the super-cycle can last until at least 2020, even though the huge increase in capital spending during 2017-18 that substantially increased capacity will make further declines in the price of memory chips inevitable.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Ricky Seo
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