DRAM suppliers will not escape the financial challenges of the global credit crunch as they look to fund capital spending, according to iSuppli.

“Even with the expected intervention by the US government, this crisis means the cost of capital will rise because cash-strapped banks will be reluctant to take on big, risky ventures. This is a particular challenge for the capital-intensive DRAM manufacturing business," said Nam Hyung Kim, director and chief analyst for iSuppli.

“This will have the impact of reduced capital expenditures among DRAM suppliers in early 2009,” said Kim.

While some observers have identified German DRAM supplier Qimonda as being the company most at risk due to the current conditions, iSuppli believes the company may be more secure than its competitors.

“Qimonda actually has a relatively good cash balance and a low debt ratio for potential leverage in the future compared to many other DRAM suppliers,” Kim observed.

According to the marketwatcher, the credit crisis comes on top of rapidly deteriorating conditions in the DRAM market.
 

DRAM demand had been strong until the second quarter. However, the situation changed starting late in the third quarter. Worrying signs for PC demand include a warning from No.-2 vendor Dell that sales growth would fall short of previous expectations in the third quarter.

On the supply side, DRAM inventories have swelled far above nominal levels, said Kim.

“The growing margin between spot and contract prices is a bearish sign for future DRAM pricing and demand,” said Kim.

“OEM contract prices for 2Gbyte PC DRAM modules will further decrease to the $20 to $25 level, down from the current $30 to $35 range, due to the flood of inventory. This level of pricing represents a ‘dead-zone’ for manufacturers, because it is less than the variable costs for the most DRAM suppliers,” he added.