Last week saw reports of the largest producer of memory suddenly buying Flash and mobile DRAM from their competitors. The most obvious reason for this move would seem to be that they need to supplement their insatiable demand for their own electronic products with outside sources. While we believe strong demand, coupled with slower supply growth, has been the cause for explosive price increases in the last 6 months, we believe the real reason for this move is the recent saber rattling in North Korea. It started with the North's propaganda map of their proposed strategic missile strikes into the U.S. Besides the obvious targets of Washington D.C., and one or two west coast cities, the only other target was Austin Texas. Why Austin? Well, it happens to be the home of a large logic fab belonging to this South Korean producer!
While no one believes the North can hit the U.S., that map does reveal the North's thinking about what their top targets would be in the South if hostilities escalate. These top targets are also the biggest strategic risk to the rest of the world…..solid state memory. It turns out that 55% of the world's flash memory and 65% of the world's DRAM is produced within 85 miles south of the Korean DMZ. In fact, this major memory manufacturer produces all of their memory (over 40% of the world's supply of each type) in one complex called Nano City, 65 miles from the DMZ. Last year, they even added the world's largest fab to this complex, which cost over $10 billion. The market is beginning to realize the potential risk to supply as we are starting to see premiums placed on memory produced from countries not in a technical state of war. After all, why would anyone put their electronic end products at risk to the actions of Kim Jong Un if you didn't have to. History has shown that when natural (or manmade) supply disruptions of strategic components occur, the ability to source these components boils down to not how much you are willing to pay, but whether you are already a customer and will receive an allocation.
The risk to the largest memory producer is immense as one strike to Nano City would put an instant stop to the world's biggest electronic producer's products. Undoubtedly, they are now scrambling to reduce their vulnerability by shutting down some of their Nano City production lines and moving the equipment to a new memory fab in China. Since there is not any spare capacity, they are sourcing memory from their competitors to meet their current customer commitments while these lines are off line. The lost production while this equipment is being moved will have a big impact on the industry in the second half of the year. This is due to the need to build inventory in the slow first half to meet the much stronger demand in the second. Since inventory isn't being built, we think when it comes to memory prices, you haven't seen nothin' yet.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Securities offered through First Allied Securities, Inc., A Registered Broker Dealer, Member FINRA/SIPC.