Semiconductor cycle likely to remain on upswing this year

Earlier this year, the prevailing view among memory chip analysts was that the strong semiconductor cycle would weaken this year amid a rapid increase in supply. Now, this forecast seems to be off the mark.

Market analysts say that concerns about memory chip oversupply have subsided as demand remains strong amid a slower than expected output increase.

They note that demand for server and mobile products has been increasing steadily, while it takes time for chip producers to enhance the operational efficiency of new production lines and improve the yield rates of high-end products.

For these reasons, the prices of DRAMs and NAND flash remain firm, contradicting the earlier forecasts that their prices would fall this year.

“The memory chip market is likely to remain on the upswing this year,” said an analyst. “This is why we forecast that Samsung Electronics and SK Hynix will set new records in quarterly operating income during the remainder of the year.”

DRAMeXchange, a global market research firm, predicted a 3% year-on-year price increase of DRAM chips in the second quarter of the year. The average contract price of the 4GB DDR module, one of the flagship products in the memory market, rose from $33 to $34 last month.

The prices of NAND flash chips, used mostly for solid stage drives (SSDs) and USB drives, also increased in the second quarter, although the gain was not as large as that of DRAM chips. The contract price of single level cell (SLC), a premium product, rose by up to 2% last month, with a further price increase expected in May.

The main reason for the strengthening memory chip prices is a slower than expected pace of output growth.

Chip producers have significantly expanded their production facilities, but they need more time to put these new production lines in full operation. DRAMeXchange noted that the production facilities constructed this year would not be in full swing until the end of the year.

"It is true that the increase in DRAM output is not meeting our expectations," said a Samsung Electronics official. “It takes at least three years to increase production capacity. So it is not easy to ramp up output in line with demand growth.”

Another reason is the difficulty in improving yield rates due to increased complexity in the production process.

In particular, companies are having difficulty in raising the yields of 64-layer V NAND and 72-layer 3D NAND products due to the complexity of the fabrication process. This is also affecting the development of the next-generation NAND flash.

“You cannot say you have developed a new product before you attain a certain yield rate,” said an official of SK Hynix. “But it is not easy to reach the average yield rate of 80 percent for high-end products. This is why we cannot swiftly meet market demand for these products.”

The forecast that supply will fall short of demand for the time being has led Samsung Electronics and SK Hynix to increase investment.

Last year, Samsung Electronics invested 27.3 trillion won, the largest ever amount of investment. The company is expected to make a similar level of investment this year. SK Hynix, which invested about 9.6 trillion won last year, plans to increase spending to 13.2 trillion won this year.

The two companies’ massive investment in the chip sector is expected to continue next year.