[The Crisis of K-Semiconductors] Prices Dropping Sharply... Preparing for the 'Real Winter'

①Supply and demand improvement possible only in the second half of next year... Survival struggle begins

[Asia Economy Reporter Park Sun-mi] The outlook for K-semiconductors, which support the Korean economy, in the second half of the year is bleak due to the expectation that prices of memory semiconductors, which have accumulated inventory amid inflation and a global economic recession, will plummet. In fact, the average price of memory semiconductor DRAM, which surged due to the COVID-19 impact, has fallen for the first time in two years. With Korean companies occupying more than 50% of the memory semiconductor market, the sharp price drop inevitably deals a direct blow to their performance. Domestic companies have responded by increasing the production ratio of high value-added products and postponing expansion plans to survive, but they are deeply concerned about the demand cliff that is expected to continue for the time being.

◆ Has the semiconductor super boom ended? = According to the market research firm DRAMeXchange on the 20th, the fixed transaction prices of DRAM and NAND last month averaged $3.35 and $4.57 respectively for general-purpose products for PCs and memory cards/USBs. These figures are lower than $3.71 and $4.81 at the end of last year. The downward trend in memory semiconductor prices began in the first half of the year. Earlier, the Wall Street Journal (WSJ) reported, citing market research firm TrendForce, that the average contract price of DRAM in the second quarter of this year decreased by 10.6% compared to the same period last year. This is the first quarterly decline in average DRAM prices in two years. This downward trend is expected to steepen further in the second half of the year.

This is because demand for IT devices using semiconductors is rapidly shrinking due to the prolonged Russia-Ukraine conflict, inflation, and rising interest rates. Samsung Securities, based on statistics from market research firm Strategy Analytics (SA), announced that the global smartphone demand forecast for this year has been revised downward from 1.42 billion units in September last year to 1.394 billion units in December and 1.284 billion units in June this year. Furthermore, the forecast for next year was also revised downward by more than 100 million units from 1.445 billion units announced in September last year to 1.32 billion units in June this year.

The economic rebound in China, the largest market for IT and electronics products, greatly affects the slowdown in the decline of memory semiconductor prices. However, China's economic growth rate plummeted to 0.4% in the second quarter this year, and due to major city lockdowns under the 'Zero COVID' policy, a significant recovery is unlikely in the third and fourth quarters. Even in the enterprise server segment, which had served as a price decline buffer, prices are sharply falling.

TrendForce predicted that DRAM prices in the third quarter could fall more than 10% compared to the previous quarter, and revised the expected NAND price decline from 3-8% to 8-13%.

An industry insider said, "Especially for server-use, where the price decline was less severe, if the global economic downturn continues and global IT companies delay or reduce data center investments, it will be a direct hit," adding, "If the economy worsens, even the high value-added server memory semiconductor market could face a crisis."

The market is reacting immediately to these concerns. The Philadelphia Semiconductor Index, which tracks major U.S. semiconductor companies such as Intel, Micron, and Nvidia, was above 4000 at the beginning of the year but has fallen more than 30% to around 2600 currently.

◆ Duration of the dark tunnel... Diverging forecasts = Opinions differ on whether the semiconductor industry's winter will be short and painful or prolonged. If multiple adverse factors such as the Russia-Ukraine war, China's COVID-19 lockdowns, hyperinflation, and potential economic recession persist, the demand contraction for products using semiconductors is expected to be prolonged. Consequently, the pain will inevitably be extended.

On the other hand, the fact that the semiconductor cycle's ups and downs have shortened compared to the past, reducing volatility, gives hope that the crisis will not last long. Also, unlike before, the semiconductor market is now dominated by a few global companies, making it somewhat possible to control supply-demand imbalances.

Industry insiders expect that companies purchasing memory semiconductors to manufacture products will complete inventory adjustments by the first half of next year, and if semiconductor companies, having endured a cold winter, show limited supply growth due to reduced capital expenditures, gradual supply-demand improvements in the memory semiconductor market could appear around the second half of next year.

However, the prevailing atmosphere is that companies should enter a pause in investment and prepare response systems for now.

There are reports that SK Hynix is considering reducing its capital expenditure by 25% next year to around 16 trillion won. The expansion plan for the Cheongju plant in Chungbuk, which has been underway with about 4 trillion won invested and aimed for completion in 2025, has been put on hold. SK Group Chairman Chey Tae-won even mentioned the possibility of changes to existing investment plans due to economic uncertainties.

In the global market, Apple, a major customer in the semiconductor industry, has announced tightening management by slowing hiring and reducing spending to cope with the economic recession. Also, Micron, the third-largest semiconductor company in the U.S., has indicated plans to reduce capital expenditures next year considering the slowdown in IT demand.