There would seem to be a slight glimmer of hope for DRAM memory manufacturers as iSuppli Corp. has upgraded its rating of near-term conditions for suppliers to “neutral,” up from its “negative” assessment issued in November 2007. 

The upgrade is due to lower levels of expected capital spending that overall will see a slow-down in wafer capacity increases, thus improving the supply/demand balance. The market research firm expects megabyte DRAM prices to rise by 2 percent during the second quarter.

“Although the DRAM suppliers themselves are still carrying more inventory than normal, stockpiles in the channel have been reduced significantly,” said Nam Hyung Kim, Chief Analyst at iSuppli. “Furthermore, OEMs including the PC makers now are at optimal DRAM inventory levels, meaning their orders will increase during the critical third-quarter holiday build season.”

Should inventory levels make further declines, iSuppli expects to become more confident of a turnaround later in the year.

However, concerns remain, as Kim believes that pricing has a long way to go before DRAM manufacturers see a return to profitability.

“The average per-megabyte price for commodity DRAM has dropped by more than 80 percent during the last 12 months,” Kim observed. “Thus, in order to return to pricing levels from a year ago, suppliers would need to increase prices by 500 percent, boosting them to $6, up from $1—an impossible occurrence.

“Because of this, DRAM suppliers will still face major barriers to profitability in the near future. If poor market conditions persist for a few more quarters, some suppliers may face bankruptcy risks due to shortages of cash. Depending on their cost control efforts, the improving supply/demand situation will spur a return to profitability for the surviving competitors in the second half of the year.”

Although not mentioning DRAM manufacturers by name, it is widely noted that Qimonda AG in particular is in a cash crunch position.

The vast majority of DRAM manufacturers have drastically cut capital spending for 2008 by approximately 40 percent, according to iSuppli.

But the continued losses most have generated in the first quarter of 2008 could see further capital spending reductions as companies struggle to preserve cash balances. This should cause capital spending for the industry as a whole to decline by more than 50 percent in 2008 compared to 2007, iSuppli believes.

“With these capital spending cuts, DRAM megabyte shipment growth for the industry as a whole is expected to slow in 2008,” Kim noted. “Originally, megabyte shipments were expected to rise by 61 percent in 2008, compared to an 89 percent rise in 2007. However, potentially reduced capital expenditures will lower iSuppli’s previously estimated 61 percent increase to the mid-50-percent level this year. This will result in a more balanced supply/demand outlook in the second half of the year, stabilizing DRAM prices and profits.”