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Which Way Will Memory Pricing Go?

Spot memory prices have been heading downward. For people like us, that’s good.

Very briefly, the memory market has two components. The vast majority of production gets sold to big clients at contract prices. So a Dell will agree to pay $X for all the chips it ordered for X number of weeks.

Whatever is left goes onto the spot market for everyone else, where prices can change quickly and radically. The reason for that is precisely because most production is tied up elsewhere, and minor fluctuations in demand from the big guys means a lot more or less supply for the spot market.

For instance, let’s say production is 100 million chips, and let’s say normally the big guys take 90 million, and everybody else gets 10.

If the big guys experience about a 5% drop in demand, and only take 85 million, that means instead of 10 million chips, the spot market has to get rid of 15 million chips, over 50% more. Prices drop on the spot market, a lot.

This works the other way, too. If the big guys get a 5% increase in demand, and now take 95 million chips, that only leaves 5 million chips for the spot market. Prices rise on the spot market, a lot.

Unlike many other industries, memory manufacturers absolutely hate to cut back production, and only do so when they have no choice in the matter. That’s because making memory is a long drawn-out process, and if they shut down production, it takes quite a while to get it back up again.

They also know that their industry is a game of Weakest Link. Cutting production means taking the risk that the company will lose customers and market share, which increases the chances the market will do an Anne Robinson and go “Goodbye.”

Hynix definitely looks like The Weakest Link among the memory big boys. It’s bleeding money. Micron offered to take it over (and start slicing and dicing its expensive production, no doubt in part by slicing and dicing the workforce, too).

After initially agreeing, the Hynix board apparently decided not to vote itself out of existence. After all, it’s fun spending other people’s money without worrying about paying it back. Ask anybody who used to run a dot.com.

However, those who have been paying the bills informed the board that the gravy train was over, they wanted to get paid Real Soon Now, and they weren’t going to throw good money after bad.

So Hynix is going to sell itself, but what’s going to happen is very unclear now. They teed off Micron, and nobody else is particularly interested in buying them. This means Micron can just sit and wait while Hynix twists slowly in the wind for a while. Micron will probably buy them after a while, but probably for a good deal less than they were ready to pay two weeks ago.

This surely will not make Hynix’s creditors too happy, but they’re not in a very good position to play chicken with Micron for very long unless they get an attitude adjustment and decide to throw more good money after bad.

What does this have to do with short-term memory prices? Again, this is a very jittery market that jumps on anything. Hynix makes a lot of chips. Should Micron buy them, they’ll probably dump the hopeless inefficient production units sooner, and improve what’s left later. The jittery market will probably jump on the former and try to get prices up as though Micron could slash Hynix production instantly.

Prices have been heading downward for two reasons, one good, one not so good. The good reason is lackluster memory demand combined with continued expansion in production by the memory companies. The not-so-good one is this Hynix saga. It’s not so good because even if Micron ends up buying Hynix, they’re not going to slash production instantly, though the market will act like they could.

The only person in the world who has a half-decent idea what is going to happen is Micron’s CEO, Steve Appleton, and he won’t talk.

Probably the only safe thing to say is that the longer the uncertainty continues, the more prices will drop, but that trend can turn around savagely with one firm news announcement (or jump up and down just on rumors).

In short, while the fundamentals say down for a while, this market doesn’t necessarily pay much attention to such things in the short term.

Ed

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