uploads/2017/03/A8_Semiconductors_MU_Contract-and-spot-price-DRAM-1.png

Could Micron Benefit from Higher DRAM Contract Pricing?

By

Updated

DRAM contract pricing

At the June 2016 Susquehanna Semi, Storage, and Technology Conference, Micron Technology’s (MU) chief financial officer, Ernie Maddock, stated that the company would continue its transition to lower nodes irrespective of the DRAM (dynamic random access memory) pricing environment as it aims to become the lowest-cost provider.

The current demand environment is favorable with spot prices rising. However, Micron may not get the benefit of the spot market as it receives contract prices. 

The DRAMeXchange chart above shows that the contract price increased in February 2017 as customers secured their supply ahead of 2H17 when they need memory for their products. The contract prices differ from company to company depending on their business prospects and demand profiles.

Article continues below advertisement

Shift in product mix continues

In fiscal 1H16, Micron Technology’s (MU) DRAM product mix was more inclined toward PCs, as its mobile DRAM took a little longer to qualify. Now that this obstacle has been removed, the company expects to rebalance its product mix with higher exposure to the server, mobile, and embedded sectors.

Micron Technology expects DRAM supply to grow 15%–20% and its demand to grow 20%–25% in 2017. The supply situation is further exacerbated with different DRAM products for mobile, server, and PCs.

Tighter supply conditions encourage longer contracts

In these tight supply situations, customers have limited opportunity to rebuild inventory. Maddock stated that customers are now looking to operate with slightly more buffer over the anticipation of a possible supply shortage in the future. They are also looking to enter into longer-term contracts.

As a general trend, mobile and server contracts are longer than PC contracts. However, PC makers are now looking for a contract with a similar term as mobile and server contracts. On the other hand, embedded contracts in the automotive sector have a term of five to seven years.

Limited supply and higher demand would force Micron Technology to prioritize some customers over others. Earlier, Hewlett Packard Enterprise (HPE) stated that Micron Technology is shifting its focus toward mobile customers like Apple (AAPL).

How would Micron balance supply among customers?

Micron Technology (MU) operates in a dynamic memory market, but it can’t react to changing circumstances due to its existing relationships with customers. It has to maintain a supply balance between customer relations and higher spot margin that would prove beneficial to its shareholders.

Next, we’ll look at MU’s NAND business.

Advertisement

More From Market Realist