In the fast-paced, hi-tech world of computer memory manufacturing, Korea is home to some of the world...
However, better production techniques are increasing DRAM output beyond even the present rocketing global demand. This is exerting substantial pricing pressure on the producers as the fight for market share intensifies.
The rough benchmark for the market strength is traditionally the 64MB DRAM spot price. This has dropped from $9 in December last year to under $7 as at mid-February. The high levels of stockpiling should maintain the downward pressure into the next quarter.
There is even speculation that prices could be forced as low as $4 by the second quarter of 2000. Even so, spot prices are not directly linked to the profitability of the companies that make them because players such as Samsung and Hyundai do not sell stock on an ad-hoc basis, but have long-running contracts that give them a more stable revenue.
Chong Hwa Jon, an analyst at SalomonSmithBarney, says: "The $4 spot price does not mean much, as spot prices are extremely volatile compared with contract prices. To put it simply, the contract price is similar to the one-month moving average of the spot price and is therefore far less volatile - this is where the actual volumes lie.
The spot price can rise as high as $21 - as it did in late September 1999 following the earthquake in Taiwan - or drop as low as $4. The trading volume, however, does not necessarily follow. Even at a spot price of $4, the most active trading volume would be around $5 to $6."
Jon is less concerned about short-term DRAM price volatility than long-term demand. He expects a 10%-20% share price drop in the short term, but in the medium term he is bullish.
His optimism is founded on three bases. The first is the fact that the share fall will give these companies more potential upside. The second is the fact that Intel has had problems rolling out Pentium III 550s in sufficient quantities to satisfy demand and consequently this has dampened demand.
As these issues are resolved over the next couple of months, demand should jump. This will coincide with the mainstream roll-out of Windows 2000 and the IT spending sprees that is expected to accompany it.
The third basis for optimism is the fact that seasonal fluctuations indicate that a rebound in the market should start by the middle of the year.
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