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Business trends

Cryptocurrency slowdown throws cold water on DRAM market

Flat demand and rising output mean memory prices likely to fall this year

Demand for DRAM chips has been sluggish in recent months, as cryptocurrency mining becomes less trendy and smartphone sales slacken.   © Reuters

TOKYO -- The collapse of the cryptocurrency bubble is rocking the market for DRAM chips in Japan and elsewhere, which had been firm up to now.

Demand from smartphone manufacturers, data centers and cryptocurrency "miners" are the three pillars of the memory chip market. But one of the pillars -- demand for DRAMs from virtual currency miners --has weakened badly.

With slack growth from smartphone makers adding to the downward pressure, DRAM prices appear likely to fall for the first time in two years.

"Orders for DRAMs fell noticeably in April," a representative at a Tokyo electronic parts trader said. "We previously received quite a lot of orders, even from companies with whom we did little business." Demand was particularly strong from virtual currency miners, the representative said.

Mining refers to the process of verifying transactions in a cryptocurrency system. It involves processing huge amounts of data to decrypt a code. The first person to solve the puzzle is allowed to record the transaction data on a blockchain, a digital public ledger, and receives coins as a reward.

Mining requires quick number-crunching, something that DRAM chips packed into a computer component called a video card are good at. During the height of the cryptocurrency boom, miners would often hoard DRAMs to expand their computing power quickly.

As the virtual currency mania wanes, demand for video cards has slumped. At one parts shop in Tokyo's Akihabara electronics district, video cards fill the shelves. "Until February, we would receive 10 calls a day asking if we had such and such video cards in stock," said a clerk at Dospara, a computer equipment store in Akihabara. "These days, we're doing well if we get one such call a week."

A big heist in January from Coincheck, a Tokyo virtual currency exchange, has given people pause. "Businesses have grown reluctant to try their hand in the cryptocurrency market," said one person at an electronics parts trader.

Before the theft, coin miners gave an additional boost to the price of DRAM chips, which was already on the upswing thanks to heavy buying by smartphone makers and data centers, which were scrambling to keep up with growing demand for cloud services.

The price of memory chips has tended to fall over time as technology improves and manufacturers ramp up production. Unusually, DRAM prices began climbing in the spring of 2016, as supply failed to keep up with demand. Supplies grew still tighter, starting in the fall of 2017, as demand from individuals and companies in the cryptocurrency mining business rose. The miners were responding to rocketing prices for cryptocurrencies such as bitcoin.

Spot prices for DRAM, which are sensitive to fluctuations in supply and demand, began rising sharply in the fall of 2017. Benchmark 4-gigabit DDR3 prices rose 20% to around $4 per unit in December 2017, compared with three months earlier.

Bulk prices for DRAM chips, which personal computer and parts makers pay, were up more than 20% in March from a year earlier, reaching $3.70.

The additional demand from coin miners spawned hopes that they represented a new market segment, according to one person at a DRAM manufacturer. But those hopes were dashed over the space of just six months or so.

China's once red-hot smartphone market is cooling.   © Reuters

Meanwhile, demand for DRAMs for smartphones is showing clear signs of flattening as Apple cuts production of its newest iPhone X and China's smartphone sales weaken. Smartphone shipments in China in the January-March quarter totaled 87.5 million units, down 16% on the year, according to U.S. market researcher IDC. That was the fourth straight quarter of year-on-year declines. Shipments by top player in China Huawei Technologies rose 1.9%, while other manufacturers, including Oppo, lost momentum.

At the same time, DRAM supplies are increasing. South Korea's Samsung Electronics and Micron Technology of the U.S., two big producers, are cranking out ever more memory as more circuits are squeezed onto chips. "Their shipments are gradually increasing," said an official at one trading company.

With a glut on the horizon, large-lot DRAM prices stopped rising in March for the first time in nine months. Buyers and sellers are beginning to agree on lower prices. Price-setting talks are under way for April-May shipments and beyond. They appear to be headed lower.

The value of DRAM shipments are expected to peak in 2018, according to IHS Markit.

Large-lot prices for NAND flash memory, the other main type of memory chip, were already dropping in February. With more high-capacity chips available and moribund smartphone sales, benchmark prices are around 6% lower compared with the start of 2018, at around $4.50 per unit.

Earlier this year, Samsung switched some of its production lines to DRAM from NAND. If DRAM prices crash alongside weak NAND prices, the growth of the semiconductor market as a whole could be stunted.

Price declines would slow memory production, in turn weighing on shipments of companies that produce chipmaking equipment and silicon wafers.

These trends indicate the current semiconductor "super cycle," in which the entire industry grows, is slowing.

One piece of good news for the DRAM market is demand from data centers, which remains brisk.

Another bright spot is investment in fifth-generation high-speed mobile communications technology. Commercial service for 5G is expected to be available as early as next year in some places, and will expand thereafter. 5G will increase data traffic, pushing up demand for memory.

IHS Markit estimates the global data center market will maintain annual growth of around 10% in 2018 and afterward. Demand from data centers is likely to be the main growth driver in the DRAM market, eclipsing that from smartphones and virtual currency miners.

Takahiko Komada, assistant director with market research specialist Techno Systems Research, predicts the supply of DRAMs "will remain tight through the end of 2018, with price rises resuming."

But the mainstream view is that memory demand will peak this year. Many chip buyers in the telecom segment are moving their capital investment forward to get 5G service up and running as quickly as possible.

Overall demand may plateau in 2019 and beyond. And as supplies look ample in the future, the long-term price trend is likely to be weak.

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