"A strong DRAM price rebound should follow the short-term steep drop in price," said Jon Chong-Hwa at Salomon Smith Barney KEB Securities in Seoul.

"We believe the current price weakness will only continue through the next four to five months," he added. Spot prices for DRAMs - the "brains" that power computers- have dropped to around $5 per 64-mega bit chip from a late September high of more than $20 but analysts said this week the fall had been expected, though it was faster than anticipated. "The weakness was in line with expectations but we didn't expect it to fall so much," said Liu Chi-Tung, an analyst at SBC Warburg Dillon Read in Taipei. "The main factor is still seasonal reasons and suppliers are still digesting Y2K stockpiles.""We expect slight oversupply in Q1 and Q2 due to weak demand," Liu said.

Stabilising in second half
Besides the seasonal downturn in demand, the current price weakness is being attributed to improved productivity, which enabled companies to turn out more chips without laying additional production lines, analysts said.

"As DRAM makers have recently upgraded to 0.18-0.21 Micron (technology), their volume will increase in the first and second quarters of 2000," said Salomon's Jon Chong-Hwa.

Since DRAM prices crashed in 1995, companies have refrained from expanding production facilities for fear of another round of oversupply. The expansion of facilities has also been held in check by the expectations that the industry will shift to 300-mm wafer processing standards by 2002 or 2003, from 200 mm-diameter wafers at present.

The development of related technologies and equipment is expected to take some time, however. Analysts in Seoul, Taipei and Tokyo said prices were expected to hit a floor around June and rebound gradually or remain stable later in the year, calling the current price weakness a reflection of better yields rather than excess capacity. Volume prices for 64-mega bit DRAMs are expected to stabilise at between $6 and $7 in the second half of the year after falling to between $5 and $6.

Winners vs losers
The region's major DRAM makers, which claim about 80 per cent of the world market, will see only limited impact from the weak spot prices on their profits because they sell mostly on volume contracts, analysts said.But a sustained weakness in spot prices will inevitably affect the contract prices for volume customers, which usually reflect average price levels for a certain period, and companies with heavy dependence on DRAMs will be hit harder, they said.

Analysts expect the sluggish price to deal a heavy blow to Taiwan makers, although they are now making huge profits from the booming foundry, or contract manufacturing, business. Mosel Vitelic Inc and Winbond Electronics Corp are major Taiwanese chip makers.