Market watchers at iSuppli Corp have upgraded their rating of near-term conditions for DRAM suppliers from “negative” to “neutral,” reporting that the DRAM market is “finally” showing some signs of improvement.

ISuppli had issued its negative assessment in Q4 2007 on a full year of harsh DRAM market conditions characterized by oversupply, bloated inventories, and weak pricing.

ISuppli’s new neutral rating comes with a positive bias regarding future conditions for the market, signaling that the worst could be over for DRAM suppliers. The company’s data estimates the average megabyte DRAM selling price to have dropped by 17% in the Q1 2008, following a 31% decline in the Q4 2007. While 17% is still an above-average decline in the March quarter, the slower rate of decrease indicates the market now is bottoming out, iSuppli said.

The researcher further said that amid reductions in channel inventories, and lower levels of expected capital spending among memory manufacturers, the supply/demand balance is coming into better alignment, a development that should bolster pricing. Per-megabyte DRAM prices will rise by 2% during Q2, iSuppli projected.

“Although the DRAM suppliers themselves are still carrying more inventory than normal, stockpiles in the channel have been reduced significantly,” said Nam Hyung Kim, chief analyst at iSuppli, in a statement. “Furthermore, OEMs including the PC makers now are at optimal DRAM inventory levels, meaning their orders will increase during the critical third-quarter holiday build season.”

This is paving the way for an expected market recovery, according to iSuppli, which noted that when indications of a significant decline in DRAM supplier inventories appear the market research company is likely to further upgrade its rating of market conditions to “positive.”

But don’t hold your breath for ‘positive’ rating …

According to iSuppli, DRAM suppliers’ inventory/sales ratio is at about the 0.7 to 0.8 level, meaning that their stockpiles are equivalent to 70 to 80% of their sales. This is far above the healthy range of 0.4 to 0.5, the company stated.

On that, DRAM suppliers early this year announced plans to cut their capital spending on production capacity  by about 40% in 2008 compared to 2007. “But due to a lack of profitability and diminishing cash reserves over the past several months, many suppliers won’t be able to afford spending even at such a reduced level, and may slash their capital outlays by an even greater margin this year,” iSuppli noted. This will ripple throughout the DRAM industry, as iSuppli warned that such capex cuts by DRAM suppliers should cause capital spending for the industry as a whole to decline by more than 50% in 2008 compared to 2007.

“With these capital spending cuts, DRAM megabyte shipment growth for the industry as a whole is expected to slow in 2008,” Kim said. “Originally, megabyte shipments were expected to rise by 61% in 2008, compared to an 89% rise in 2007. However, potentially reduced capital expenditures will lower iSuppli’s previously estimated 61% increase to the mid-50% level this year. This will result in a more balanced supply/demand outlook in the second half of the year, stabilizing DRAM prices and profits.”

Top DRAM supplier Samsung Electronics Co, however, is bucking that trend. The company is expected to increase its rate of megabyte production in 2008 by 87% compared to 86% in 2007.

Meanwhile, smaller but still significant memory market players have recently begun partnering on DRAM to better leverage manufacturing costs. Qimonda and Elpida, as well as Micron and Nanya, announced collaborations this week that are expected to result in joint design and shared production.

“Everyone knows a rebound in the DRAM market is inevitable; the only question is when,” Kim said. “The DRAM market is inherently cyclical, meaning a market recovery is certain to arrive.”

Kim predicted DRAM market conditions will slowly improve starting in the current quarter.

“Nonetheless, the improved market conditions don’t mean that suppliers can achieve profitability in the near term,” Kim said.

“The average per-megabyte price for commodity DRAM has dropped by more than 80% during the last 12 months,” he continued. “Thus, in order to return to pricing levels from a year ago, suppliers would need to increase prices by 500%, boosting them to $6, up from $1—an impossible occurrence.

“Because of this, DRAM suppliers will still face major barriers to profitability in the near future. If poor market conditions persist for a few more quarters, some suppliers may face bankruptcy risks due to shortages of cash. Depending on their cost control efforts, the improving supply/demand situation will spur a return to profitability for the surviving competitors in the second half of the year,” Kim concluded.

By: DocMemory
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