TECH NEWS – This is the best-case scenario for suppliers and the worst-case scenario for everyone else, including us.
In recent weeks, the memory market has entered an interesting phase, as widespread panic among retailers and certain supply chain players has led to the belief that Google’s TurboQuant compression algorithm will end the supercycle. This has led to a decline in the market capitalization of memory manufacturers and a global drop in DDR5 prices for consumers. However, according to Hankyung, the demand cycle is far from over. In fact, hyperscalers like Google and Microsoft are rushing to sign long-term agreements with SK Hynix that will remain in effect until the end of the decade. As of April 5, according to industry sources, SK Hynix is in the final stages of negotiations with Microsoft regarding a long-term DDR5 supply contract. The contract is worth tens of billions of won and will be in effect for three years, starting this year.
While we have seen long-term supply agreements in the memory industry before, we might have assumed that they were limited to Samsung. Now, however, with SK Hynix also seeking a similar arrangement, two key factors regarding overall memory demand emerge. First, by signing three-year contracts, suppliers anticipate sustained demand in the coming quarters, allowing them to manage their expansion plans and revenues. Second, the three-year contract indirectly indicates that the memory cycle, estimated to end in 2028, may extend further.
Hyperscalers are not currently concerned about entering into memory agreements that could cause them trouble later on. Rather, their primary goal is to secure enough DRAM to expand their infrastructure. Memory costs account for more than 30% of hyperscalers’ total spending, indicating that DRAM is a critical commodity for these companies and that they are willing to do whatever it takes to secure the supply. Instead of price wars, memory markets are essentially supply wars, where the winners are those who stockpile DRAM.
These long-term contracts are unfavorable for the consumer PC industry because they prevent future production expansions and extend the demand cycle. This may indirectly suggest that prices will remain high for several years. Considering this factor alone, opportunities similar to the TurboQuant sell-off may be a few of the instances that have pushed DDR5 prices down. However, at the macro level, DRAM spot and contract prices will rise aggressively.
