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Enron – the DRAM angle

Short covering, loose lips and cavalier practices

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Enron, the corrupt energy trader, was feted for its ability to turn dull things - gas, broadband, data storage and sundry utilities - into trading pits.

Transferring techniques from the financial markets, the Texas company made those dull things exciting, pumping liquidity through pipes and down wires. We now know that this was worked through smoke and mirrors, powered by corruption at senior levels, engineered by extraordinary accounting practices which were, in turn, condoned by an extraordinary accountancy firm.

For a while Enron was America's seventh biggest company. Now it could be America's biggest fraud. Eventually, off-balance sheet shenanigans did for Enron. But did Enron's collapse do for DRAM?

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.

It comes down to "short covering, cavalier business practices and loose lips", Fechtor Detwiler suggests in a fascinating research note, from which we quote extensively.

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.

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