Elpida Bankruptcy Likely To Have Huge Impact On DRAM Market

Feb.29.12 | About: Elpida Memory (ELPDF)

As most know by now, Elpida (OTC:ELPDF) filed for banktupcy protection Monday. Elpida was the 3rd largest supplier of DRAM on Q4 2011, with a 13% share, in a market presently dominated by Samsung with a 41.7% share of the $8.7 billion (Q4 2011) market, as per iSupply.

I've long talked about how cyclical markets turn on bankruptcies, since these remove production capacity from the market. This is even more so in markets for products such as DRAMs, because of a very important specificity: in high tech markets, the product and production technologies are always advancing and making previous generations obsolete - this means that the business demands a constant outlay in capex to keep abreast of new technologies. Now, firms that go bankrupt can no longer invest in the necessary capex and thus their production capacity is rapidly removed from the market by obsolescence. This is in contrast, for instance, to a cyclical industry like shipping. If a shipping company goes bust, the ships are not removed from the market, they just change owners. They are not obsolete and won't be for decades to come, so it becomes very hard to remove capacity.

It was thus not very surprising that the entire DRAM industry reacted with joy, and Micron (NASDAQ:MU), in the U.S., shot up strongly.

Still, it was amazing how fast the product (DRAM) pricing changed on the news. The table below comes from dramexchange.com. The instantaneous increases in price - many over 10% - were really amazing:

Click to enlarge


Elpida's bankruptcy seems likely to change the demand/supply picture of the DRAM market at least for the medium term - until the remaining players, once again, flood the market with product. The instantaneous impact on DRAM prices was dramatic and is sure to have a very positive effect on the earnings of the remaining producers, Micron included.

This will, however, also constitute an increase in cost for users of DRAM, mainly the PC industry since tablets and smartphones use comparably less DRAM. It might thus constitute a further headwind, similar to the impact the Thailand floods had on hard disk prices but less severe, for the likes of Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC) and the main PC makers, Dell (NASDAQ:DELL), Hewlett-Packard (NYSE:HPQ) and others.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.