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Is the flash chip party over?

Posted by: Ihlwan Moon on February 21, 2006

A sharp fall in prices of NAND flash chips in the past seven weeks has sparked concerns that there might be a supply glut for the semiconductors. But there’s no hint of worry at Samsung Electronics Co., which makes more than half the global needs for the chip that retain data even when a device’s power is shut off. Samsung execs point out chip prices have been falling by as much as 50% annually but the Korean company has maintained a profit margin of more than 40% a year as production costs also fall sharply thanks to more efficient technologies. (See BW, 17/10/05, “March Of The Flash Chips”). This year doesn’t seem to be an exception.
Sure, prices have fallen 33% on the spot market in less than two months. Yet Merrill Lynch says a correction was necessary as the chips commanded a 40-50% premium on the spot market over longer-term contract prices. Spot market prices of a 2 gigabit NAND chip fell to $10.11 in Mid-February from $15.13 six weeks earlier, approaching contract prices of around $10. Merrill expects both contract and spot prices to stabilize at $8-9 by the end of March, despite a traditional post-Christmas seasonal slowdown in the first quarter. The fall is partly attributable to a cut by Samsung and other players seeking to spur demand. Other makers include Japan’s Toshiba Corp., U.S.-based Micron Technology Inc., and Korea’s Hynix Semiconductor Inc.
Despite the price fall, overall revenues for the global NAND chips this year will likely jump by at least 30% from an estimated $11 billion in 2005 because of an explosive rise in demand for memory in digital music players, digital cameras and cell phones. Recent popularity of 3G phones that allow users to quickly download music and video files to their handsets is proving to be an important driver for the growth.

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