Apple Supplier Fire Spurs Biggest Chip Price Rise in 3 Years

Prices for memory chips used in smartphones and personal computers surged 19 percent, the most in three years, as SK Hynix Inc. suspended operations in China after a factory fire. Shares of the Apple Inc. supplier fell.

The blaze occurred Sept. 4 during the installation of equipment at a factory in Wuxi, China, which manufactures dynamic random-access memory chips for SK Hynix, the world’s second-largest maker. The fire burned for about 90 minutes, the Icheon, South Korea-based company said. One person suffered minor injuries.

The price of benchmark DDR3 2-gigabit DRAM jumped 30 cents, the biggest increase since September 2010, to $1.90 on Sept. 5, according to DRAMeXchange, Asia’s largest market for the components. The surge underscores growing concerns that makers of mobile devices and PCs will suffer rising component costs due to potential supply shortages, since SK Hynix makes almost one-third of the world’s DRAM chips.

“It’s pretty impactful. When you’re taking 15 percent of capacity offline you are going to cause disruption,” said Betsy Van Hees, an analyst for Wedbush Securities in San Francisco. “We were concerned that pricing was going to go down. We think that’s off the table now.”

Chinese mobile phone makers may suffer the most from any shortages because they have been aggressive in price negotiations with chipmakers and have avoided long-term contracts, said Van Hees, who recommends buying Micron Technology Inc. shares. Larger companies such as Apple and Samsung Electronics Co. will get the chips they need, she said.

Chipmaker Shares

SK Hynix shares fell 3.7 percent to close at 27,100 won in Seoul yesterday, while the benchmark Kospi index rose 0.2 percent. Competitor Micron closed at its highest in almost seven years in New York trading on Sept. 5. The stock was up less than one percent at $15.23 at 2:42 p.m. in New York trading.

SK Hynix, which makes half of its chips in Wuxi, held a 30 percent share of the global DRAM market in the second quarter, following Samsung Electronics Co.’s 32.7 percent, TrendForce said Aug. 8. Samsung rose 0.3 percent to 1,369,000 won yesterday.

If the Wuxi factory’s production is halted for more than a week, substantial shortages could lead to higher prices, benefiting all memory-chip manufacturers, Sanford C. Bernstein & Co. said in a report.

SK Hynix’s customers include Apple, Samsung, Lenovo Group Ltd., Dell Inc. and Sony Corp., according to data compiled by Bloomberg. Apple, Samsung, Lenovo and Sony all are releasing new flagship smartphones this year as they compete in a market estimated to be worth $280 billion, according to data compiled by Bloomberg. Apple will debut a new iPhone on Sept. 10, a person familiar with the matter has said.

Clean Rooms

“We are still investigating the extent of damage,” SK Hynix said in an e-mailed statement Sept. 4. “Currently, there is no material damage to the fab equipment in the clean room, thus we expect to resume operations in a short time period so that overall production and supply volume would not be materially affected.”

Chips are made in a room that is thousands of times cleaner than a hospital operating room, according to a definition on Intel Corp.’s website.

Lenovo has an adequate supply of chips for the third quarter, Mark Stanton, director of operations communications, said in an e-mail yesterday.

Normal production at SK Hynix is expected to resume in about a month, Seo Won Seok, an analyst at Korea Investment & Securities in Seoul, said in a report Sept. 5.

“The operational shutdown will cause a global PC DRAM supply shortage,” he said.

SK Hynix on July 25 posted profit that exceeded analysts’ estimates, buoyed by rising prices of semiconductors. Second-quarter net income, excluding minority interest, rose to 946.8 billion won ($865 million) from a loss of 53 billion won a year earlier.

Lower-end smartphones will drive demand for DRAM chips in the second half, SK Hynix said in an e-mailed statement in July, and there is limited second-half supply growth for memory chips.

Before it's here, it's on the Bloomberg Terminal.