IP: Enron - the DRAM angle?

[David Farber <dave () farber net>]

> 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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