By Eun-Young Jeong 

SEOUL -- After an excruciating year, makers of memory chips have a reason to breathe a sigh of relief: The industry's slide has ended.

The latest sign of a rebound was Samsung Electronics Co., the world's largest memory-chip maker, issuing guidance that topped analysts' estimates. That follows comments from rival producer Micron Technology Co. in December that the industry has finally confronted its worst days.

A big accelerant is the global rollout of the next-generation 5G mobile networks, which should energize previously falling smartphone sales and juice company investments into artificial intelligence, computing and data storage -- areas that all require heavy memory demands.

Prices for memory chips had nosedived for much of the past 15 months. Following a historic run of profits, the industry overproduced as the global economy hit a skid and left a glut of unsold inventory.

The final three months of 2019, however, showed a return to better days. Contract prices for NAND, a major type of memory chip, rose for the first time in more than a year and half, according to TrendForce, a market-research firm. The other major memory chip, DRAM, is forecast to show contract-price increases for the first time in over a year during the first three months of 2020, TrendForce

"The surpluses in the [memory chip] stockpile are smaller than before. We're not seeing the excesses that were available three quarters ago," said Tobey Gonnerman, an executive at electronic components distributor Fusion Worldwide. He added that memory chip transactions also had ticked up in the past two months.

Despite sagging chip maker profits last year, investors had bet on a turnaround in 2020, as Samsung's shares last year rose 44%. Micron increased 64%, while SK Hynix Inc. jumped 61%. Those three companies represent the lion's share of the world's memory production.

Companies and industry observers had anticipated throughout last year that market conditions would eventually improve, but nudged the timeline back as the U.S.-China trade fight remained unresolved. Chip buyers, worried about potential tariffs and soft smartphone sales, held off on purchases.

What has become clearer, according to industry officials and analysts, is an increase in demand that is feeding optimism for a return to growth.

Smartphone sales are also likely to boost memory-chip demand. In 2020, several major markets are set to expand their 5G networks. The expansion is expected to boost smartphone sales, which have declined for two consecutive years as consumers hold on to their devices longer without upgrading them, according to Tarun Pathak, an associate director at Counterpoint Research.

But Mr. Pathak forecasts a 4% growth in smartphone shipments this year. "Memory capacity in smartphones is also increasing every year," he said.

Stabler relations between Washington and Beijing also should improve business confidence, experts say. A survey released last month showed U.S. business activity improved to a five-month high in December. In China, Beijing's efforts to spur domestic growth has given a boost to its foreign trade, which rose 4% in December from November's 1.5% drop.

Meanwhile, big internet companies such as Facebook Inc. and Amazon.com Inc. are jumping back to revamp memory-chip inventory after months of slimming down on their stockpiles, said Mark Newman, an analyst at Bernstein Research, who follows the semiconductor market.

The industry is also on a stronger footing after pulling back on investments to expand production, reducing the hazards that come with overcapacity. Memory chip makers are forecast to have reduced 2019 capital expenditures to around $44 billion, a reduction of $6 billion from the prior year, Bernstein said. That is the first spending drop after almost six straight years of increases.

"We have hit the bottom," Mr. Newman said.

Memory-chip demand has been prone to wild swings over the decades. Previous downturns drove many chip makers to bankruptcy and led to consolidation in the industry.

The latest memory-chip cycle was more protracted than usual and became coined as the "supercycle" for its extended rally period that ended in the second-half of 2018. But some industry analysts have said the companies were quicker this time in slashing production, potentially shortening the downtimes versus the past.

--Liyan Qi contributed to this article.

Write to Eun-Young Jeong at Eun-Young.Jeong@wsj.com

 

(END) Dow Jones Newswires

January 08, 2020 08:04 ET (13:04 GMT)

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