Print 15 comment(s) - last by Nagorak.. on Oct 17 at 5:58 PM

Spot prices on DRAM soar 37 percent

Samsung Electronics Comp., Ltd. (KSC:005930) is perhaps best known for its consumer electronics devices which include appliances, televisions, and smartphones.  But the South Korean firm is also a power player in the commodity market on key computer components like NAND flash storage and DRAM (memory).

I. DRAM Shortage is a Boon for Samsung

As the DRAM market slumped in 2011, this key source of profit for Samsung dried up.  But Samsung could only complain so much -- by late 2011 it was estimated to be the only chipmaker turning a profit on DRAM, and it was profit-taking on record smartphone sales.

Now the situation has flipped somewhat. Samsung has seen sales of its best-selling Galaxy smartphones -- which run Google Inc.'s (GOOG) Android operating system -- slump, but has seen a recovery in DRAM prices drive it to new heights of profitability.

Samsung semiconductor sales are at their highest levels since 2010.  In the second half of the month of September, DRAM contract prices climbed 9 percent.  And spot prices -- non-contract commodity prices -- on DRAM chips rose a whopping 37 percent.
Samsung DRAM
Samsung is cashing in, in the wake of a DRAM supply shortage [Source: regmedia]
The price bump comes in part via supply struggles from SK Hynix Inc. (KRX:000660), a top DRAM supplier.  A fire broke out last month at SK Hynix's DRAM line in Wuxi, China, a facility that accounts for 10 percent of the world's DRAM supply.  While production is expected to fully resume this month, the shutdown is expected to cut SK Hynix's output by 14 percent, and leave the overall market with a 7 percent deficit in components.

The fortunate shift in the component market has Samsung poised to exceed last year's profit by a third, according to an analyst survey.  A 45 analyst survey by Thomson Reuters I/B/E/S expects Samsung to turn a 38.5T KRW (won) ($35.85B USD) for the calendar year 2013.  Samsung announced that it expects to make 10.1T KRW ($9.42B USD) in Q3 2013.

II. Galaxy Smartphone Sales Slump

However, slumping smartphones have analysts worried about the long-term outlook for Samsung.
Samsung Galaxy S4 wide
The Galaxy S IV

Cheap smartphones in developing markets like China and India are expected to boost Samsung's smartphone sales from 76 million units in Q3 2012 to 86-88 million units.  But sales of the premium Galaxy line have been less than stellar.  Samsung is expected to sell as little as 16 million Galaxy S4 smartphones in Q3.  Samsung moved 20 million GS4s between the launch of the device in April and the end of June.  But the bottom may yet to be hit; Samsung is expected to sell as little as 13 million GS4s in Q4 2013, according to Barclays PLC (LON:ARM) analysts.

Tech analyst Lee Seung-woo, of South Korea's IBK Investment & Securities comments to Reuters:

As of now, there is no real competitor for Samsung in the (memory) chip business.  This dearth of players is expected to allow Samsung to post considerable operating profits throughout this year and next year, even if demand flags.

[But] the concern that high-end smartphones could see slower growth is a valid one. But Samsung has both the speed and fast-follower tendencies of Zara and a portfolio spanning high- and low-end products as well as components such as a brand like Swatch.

Some have complained about the "cheap" feel of the plastic-bodied Galaxy S4.  Plastic-body Androids with similar specs have been fielded by Chinese OEMs, such as Huawei Technologies Comp.'s (SHE:002502) Ascend P6.  Samsung faces a number of rivals with more intricate body designs as well such as the Apple, Inc. (AAPL) iPhone 5S, which faces a refresh to device's iconic metal-and-glass industrial design.  Apple reportedly sold 9 million iPhone 5S/5Cs on its launch weekend, and many of those sales were reportedly accompanied by trade-ins of Samsung smartphones.

Nokia Lumia 1020 
The Nokia Lumia 1020 (L) and iPhone 5S (R) are among the smartphones denting GS4 sales.

Likewise the Nokia Oyj. (HEL:NOK1V) Lumia 1020, which packs a colorful body and industry-leading camera, and an unnamed upcoming 6-inch curved smartphone which LG Electronics Inc. (KSC:066570)  is set for a November launch, according to Reuters.

More trouble may lie ahead, as well, as Microsoft Corp. (MSFT) and Nokia have teamed up to try to force Android OEMs to use Windows Phone instead.  The pair have reportedly threatened HTC Corp. (TPE:2498) with a sales ban if it did not switch.  Samsung was previously targeted by Microsoft and settled with a big licensing deal -- so it seems a likely next target if the strategy succeeds.  If Samsung is forced to switch, it does have a bit of experience making Windows phone, having made a Galaxy-like "Ativ S" Windows Phone.  However, it would certainly add a new challenge to Samsung's sales outlook if this happens.

Financially things could be worse for Samsung; HTC posted its first quarterly launch in Q3 2013, as the once-dominant Taiwanese phonemaker continues its market plunge.

Source: Reuters

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Is the RAM market starting to resemble that of oil?
By Mint on 10/7/2013 1:53:34 PM , Rating: 2
37% price increase from a 14% output issue of just one supplier? Wow.

That's the kind of price elasticity we see with oil. I guess RAM has become so cheap and essential that prices have to skyrocket before consumers cut back. No wonder these companies were guilty of price fixing. Hynix wound up increasing revenue/profit from this fire.

I hope we won't ever have to simply accept collusion like we do with OPEC.

By Solandri on 10/7/2013 3:14:56 PM , Rating: 2
The percent price increase and the percent supply drop have nothing to do with each other. If the supply-demand curve were perfectly straight and at one exact angle, then yes the two percentages would match up. But it'd be a pure coincidence.

When there's a drop in supply, the price increase depends on how much buyers are willing to bid up the price. For RAM, companies which make computers (e.g. Dell, HP, Lenovo) bid up the price of RAM to try to make sure they have enough to fulfill their current orders. Then they can ship the systems out on time.

The company left holding the bag ends up with a bunch of pre-built computers but no RAM. They need to store those computers in warehouses as they wait for enough RAM to finish production and ship them out. Those warehouses cost money. The warehouse used to store tea shipped from China, but because tea is inexpensive and computers are expensive, the computer company is able to outbid the tea company and obtain that warehouse space.

The amount the price of RAM is bid up cannot exceed the cost of this warehouse space. Otherwise all the companies would opt to buy warehouse space to store those unfinished computers, since it would be cheaper than buying higher-priced RAM to finish the computers. So the price increase in RAM is just less than the cost to buy warehouse space. And that is why the price increase of RAM has more to do with the price of tea in China, than it has to do with the percent decrease in RAM production at the Hynix factory due to a fire.

By Mint on 10/8/2013 1:08:46 PM , Rating: 2
The percent price increase and the percent supply drop have nothing to do with each other.
I never said they're supposed to be equal. I am observing the elasticity and am quite surprised.

I don't think you're right about warehousing costs being the primary driver. There's no need to build the rest of the computer in the first place if you have no RAM for it; moreover, pricing can shift demand to lower RAM models.

You'd also expect other manufacturers to ramp up production to take advantage of Hynix's accident before price even got 10% higher. Much bigger margins than usual for whichever company wants it. But maybe they don't have the capacity.

By Nagorak on 10/17/2013 5:58:13 PM , Rating: 2
I have to say that I seriously doubt warehousing has anything to do with it. Rather, companies like HP, Dell, etc, have a certain amount of orders coming in. They need to produce computers to meet those orders. Unless the price of memory becomes completely unaffordable, they'll pay more in order to complete those sales. They may either pass that price along to the customer or just eat it with a reduced margin, but either way they're going to get those computers built.

The bottom line is that when someone orders a computer they expect it either right now, or within a relatively short period of time. The companies can't just wait until all of the stars align to build a computer to meet a customer's order, they have to do it right away. If they don't someone else will end up doing it.

"People Don't Respect Confidentiality in This Industry" -- Sony Computer Entertainment of America President and CEO Jack Tretton

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