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IP: Enron - the DRAM angle?
From: David Farber <dave () farber net>
Date: Mon, 11 Feb 2002 11:58:13 -0500
Date: Mon, 11 Feb 2002 08:36:44 -0800 From: Ari Ollikainen <Ari () OLTECO com> To: farber () cis upenn edu Here's a twist on the Enron fiasco: It's claimed by the Register that Enron's announcement of its intent to enter the DRAM commodity market, and it's abortive deals with major PC makers are responsible for the recent rise in DRAM prices. The Register sometimes does good reporting, but just about every problem in "new tech" futures trading lately seems like it can be pointed at Enron...is Enron the Devil's creation? Excerpted from http://www.theregister.co.uk/content/3/23982.html Enron - the DRAM angle By Drew Cullen Posted: 07/02/2002 at 23:41 GMT [...] In events that were "little noticed and even less commented upon, Enron may have influenced yet another world market," those industrious channel checkers at Fechtor Detwiler, the Boston investment bank, say. The rise of benchmark 128Mb DRAM spot prices lately (to $4!) has had Fechtor Detwiler scratching its head - underlying demand in the channel was not strong enough. No the real reason is Enron's collapse and here's how. [...] In 2001, Enron launched a service called DRAM Price Risk Management, through its new Global Semiconductor Services Group. This was designed for big memory buyers to "'optimise cash flows by hedging prices, costs or margins' to be tactically implement through creative price administration, promising aid in meeting budgets and earnings expectations, and a reduction in inventory and logistics." Enron junked the programme because of its financial problems, and that, as Fechtor Detwiler says, should have been the end of the matter. Except... arrangements to enter deals were closer to fruition than any participant admits. All the big DRAM makers confirm that they talked to Enron but all deny signing deals. Enron management said different, touting "contracts with Samsung and 'others'," according to Fechter Detwiler's channel checkers. The company had also approached at chip brokers to act as potential supplier and buyes. On to the buy side. We'll let Fechtor Detwiler take up the story. "We were told that an Enron employee offered that they had already approached and secured relationships with major DRAM consumers Compaq and Dell. We believe that 'financial swap contracts at $4 per 128Mb PC133 chip' were suggested or consummated. In an attempt to be evasive or maybe 'cool', one source at Compaq told us that he felt fortunate that they 'hadn't gotten too deep with Enron' before the scheme failed." With Enron's implosion, the buyers had no swap contracts and went out to the memory market to build "defensive inventory". However, their brokers had already been working with Enron and "knew their threshold of pain. Supply was strangled. Further as inventory burned out of the franchised and spot market, manufacturers were also in the possession of the price point to which consumers were willing to move". So there you have it: it was cock-up rather than conspiracy that led to DRAM price movement. Blabbing Enron mouths tilted the balance firmly in favour of the DRAM makers and brokers. For once. So will prices come down now? Probably not, according to Fechtor Detwiler. PC demand remains slack, but production is shifting to higher performance units which require more memory. Coupled with reduced output, this should keep prices up through to Q3 even though PC demand is a little slack, the investment bank notes. So what does it all mean for Johnny Punter? Well, system builders are passing on DRAM price rises to their customers. But remember, this only looks expensive compared with, say, November. As Crucial.com, the retail arm of Micron points out, DRAM prices are still 25 per cent lower than this time last year, and a third of the price of two years ago. --------------------------------------------------------------------- Dilbert's words of wisdom #18: Never argue with an idiot. They drag you down to their level then beat you with experience. --------------------------------------------------------------------- OLTECO Ari Ollikainen P.O. BOX 20088 Networking Architecture and Technology Stanford, CA Ari () OLTECO com 94309-0088 415.517.3519
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