Micron To Benefit From Memory Shortages, Part II

| About: Micron Technology (MU)

Although Micron (NASDAQ:MU) has mentioned the magical words about inventory getting tight and some customers being on allocation, most investors and Wall Street analysts yawned. My first SA article began looking at current and past memory shortages and the effect they may have on Micron and it seems there may need to be periodic updates.

At least one Wall Street analyst is a believer, and has begun writing about memory shortages and what has caused them. On March 11, Peter Yu of BNP Paribas wrote in his "Asia Memory" piece:

We expect a DRAM supply shortage from 2Q13 onward. Reduced industry DRAM wafer capacity (-35% from the 2008 peak), and stronger than expected mobile DRAM demand spike from hardware spec upgrade competition by smartphone makers will tighten DRAM supply across all DRAM products.

He goes on to explain that DRAM wafer capacity has fallen since 2008:

Despite forthcoming DRAM capacity tightness there is no room for wafer capacity growth. Actually the supply base of DRAM has been adjusted down. We estimate effective global DRAM wafer capacity declined 35% to 0.97m wafers per month (wpm) in 4Q12 from the pre-Lehman crisis peak of 1.49m wpm in 3Q08. The first round of industry capacity reductions (4Q08-1Q09) was mainly driven by the PC demand-shock post the Lehman crisis.

Of course this doesn't take into account the improving yield per wafer due to shrinking geometries, but I believe this analyst feels the decreasing wspm has offset the increased yield from the smaller geometries.

While this is the most cogent and concise supply-side analysis I've read from a Wall Street analyst, Mr. Yu also lays out his thesis that dramatic things are happening on the demand side of this equation as well. Specifically he feels that increasing smartphone sales, coupled with increasing memory content per device, will offset a decline in PC DRAM bits:

We expect Samsung's Galaxy S4 to be launched in early April with shipments reaching 20m units in 2Q13. The addition of 20m units of Galaxy S4 in 2Q13 alone would be equivalent to 11m units of PCs in terms of DRAM wafer consumption. 11m units of PC is about 13.5% of the total PC market size in 2Q13, in our estimate

Geopolitical risks and natural disasters. Another factor that can effect a very tight market are geopolitical upsets and natural disasters. A pugnacious North Korea is threatening war with the world, and this sent me to looking at what it might mean for memory capacity in neighboring South Korea. Wikipedia has a list of memory fab locations, which shows that memory powerhouses Samsung and Hynix, and Micron competitors, have a number of fabs in South Korea. The experience of recent wars in Iraq and Afghanistan have shown those plants don't need to sustain any direct damage for there to be a considerable market upset. Indeed bullets don't even need to fly: ports and airports may get closed or have military traffic prioritized, air freighters and ocean freighters may be unavailable for inbound materials and outbound finished products, the electric grid may get damaged, redeployed, or shut down, etc.

Googling on how natural disasters have affected the memory market turns up floods in Thailand impacting disk prices, the Taiwan earthquake of several years ago taking fabs offline, and the Fukishima tsunami closing ports, diverting resources and even destroying capacity.

It appears these are increasingly tight times in the memory market and risk managers and purchasing agents at end use customers must be not only following the price rise on DRAMexchange.com, but following how bellicose Kim Jong-Un has become, and how devices in adjacent and new spaces are affecting their own parts availability.

Disclosure: I am long MU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.