Analyst: US credit crisis is more bad news for DRAM suppliers

Oct. 3, 2008 – Already banged up by a punishing downturn that has evaporated sales and profits (and capacity spending), DRAM suppliers must now deal with another problem: the US financial crisis will likely make it a lot tougher for them to handle debt and obtain new funds for capital spending, notes a new report from iSuppli.

The credit crisis that felled major US financial houses and banks has spilled over to affect worldwide markets, but even with US government intervention — the revised “bailout bill” was approved by Congress and signed by President Bush this afternoon — banks will remain skittish to take on risky ventures, making capital harder to come by, notes Nam Hyung Kim, director and chief analyst for iSuppli.

“DRAM suppliers that already are facing cash issues soon may not be able to service debts that are coming due soon,” he writes, and they may also encounter problems financing their capital expenditures. This is a big problem, since many DRAM firms are struggling with liquidity issues (cash burn and maturation of short-term debt) after a protracted market downturn.

Given these factors, “cash management has become the most critical issue facing DRAM suppliers,” Kim writes — and this will translate directly to lower capex through the first part of 2009.

Kim also addressed market rumors that Qimonda is on the financial ropes and could be a buyout target, Kim instead believes the firm is more solidly positioned than some competitors, with a relatively good cash balance and lower debt ratio.

The DRAM market still shows no sign of getting better, according to iSuppli, which two weeks ago cut its rating on the sector to “negative” citing severe oversupplies and weak demand amid sharp price declines and the fast-approaching seasonal lull after the post-holiday-ramp-up. Among the warning signs: No. 2 PC vendor Dell said 3Q sales would be below expectations, as did other retail outlets. The now-eviscerated financial market, outside the credit crisis, has also traditionally been a sweetspot market for corporate PC sales, but now expect layoffs and purchasing delays, a further downside to overall PC sales.

Meanwhile, DRAM stockpiles “have swelled far above nominal levels” all through the channel, from memory suppliers themselves down to the channel and OEMs. Memory firms also have started pouring product into the spot market, where a growing pricing differential vs. contract prices “is a bearish sign for future DRAM pricing and demand,” Kim wrote. He projects 2Gb PC DRAM modules to slip from currently $30-$35 down to $20-$25 — “a dead zone for manufacturers” since it’s below most DRAM suppliers’ variable costs. Look for commodity DRAM shipments to slow to a trickle as firms try to reduce their cash burn during early 4Q08 — but even this won’t be sustainable, Kim says, as these firms are already under “tremendous pressure” to meet budgets, which will only worsen market conditions further.

Despite all the negativity, there may be a silver lining, Kim points out — the lack of cash means DRAM players will finally stop over-investing, which will curb supply growth and tip the market back toward a supply/demand balance, though probably not all the way until a few quarters from now. Timing of this recovery will be very dependent on larger economic fixes, though, he said.

Bottom line: “There is no good news in the DRAM industry right now,” Kim writes. “The DRAM crisis is continuing along with the financial crisis. Until there are “meaningful production cuts from tier-one suppliers or near term major consolidation, we will maintain our negative rating for near-term conditions for suppliers.”


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