DRAM will remain cheap for a long time

A continuing glut in DRAM chips is likely to keep prices low for a year or more, analysts have predicted, making it a good time for consumers to add memory to PCs or laptops, but a bad time for chip manufacturers.

The current DRAM downturn – prompted by greater expectations of Windows Vista than it delivered – will probably last more than a year and possibly two, said Simon Woo, memory chip analyst at Merrill Lynch at a recent conference.

"It's longer than expected," he said, comparing it to the DRAM industry crunch of 1997-1998, which lasted nearly two years.

The current glut started in the middle of last year and was caused by DRAM makers building too many new factories in anticipation of strong DRAM demand for PCs armed with Microsoft's Vista OS. The OS requires 1GB of DRAM per PC to run well, compared to just 128MB for Windows XP.

Vista didn't take off quite as DRAM makers had hoped, leaving the market awash in excess chips. Prices have fallen from $6.25 (£3.12) in the middle of last year to $1.92 (96 pence) this week.

Such huge price declines in the DRAM market caused Gartner to pare its global chip revenue growth forecasts for this year to just 3.4 percent, from a previous estimate of 6.2 percent.

Most analysts believe prices will reach their lowest point in the second quarter of the year, because that's when PC demand is seasonally weakest.

"We expect DRAM prices to fall another 10 percent in the second quarter of 2008 as PC DRAM content growth slows and inventory rebuilding ends," said Matt Evans, memory chip analyst at CLSA, in a report. He expects DRAM makers to cut spending on new production lines, which could spur a price recovery of as much as 10 percent in the third quarter.

Do Hoon Lee, memory chip analyst at Macquarie Securities, warns that second quarter DRAM price declines could be far worse than expected if DRAM makers unload inventory into the market. Macquarie expects many DRAM makers to put the construction of new factories on hold, a move that could boost DRAM prices a bit.

But DRAM makers cannot afford to cut back too much on production, partly because of the global credit crunch, and partly through fear of losing market share. The credit crunch means it's harder for companies to find new funding, so DRAM makers need to keep selling chips - even at cut-rate prices - to ensure a steady flow of cash to fund continuing operations.

The heavy cost of building new DRAM factories is also an issue. Such plants can cost up to $3 billion (£.15 billion) each, and companies normally run them 24 hours per day to get as much out of them as they can.