Is DRAM Aspiring to Be the "Black Gold" of Oil? ...The Real Risk Behind Micron's Earnings [Tech Talk]

SCA Resembles Oil Futures Collar Strategy

But Spot Market Has Greater Impact on Semiconductors

Downward Spot Prices Could Lead to Renegotiation Pressure

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The most important aspect of Micron's earnings report, released on the 24th (local time), was the announcement of 16 "Strategic Customer Agreements (SCA)." These agreements set both minimum and maximum prices for DRAM semiconductors through 2030, helping to mitigate the risk of price crashes during downturns.

This has led to optimistic predictions that it could serve as an opportunity to "structurally re-evaluate" memory semiconductors, which have long been notorious for their extreme cyclical swings.

But does Micron's SCA really have the potential to be a game changer that structurally transforms DRAM pricing? In fact, contracts that set price ceilings and floors for highly cyclical commodities are common in the energy sector, such as in oil and gas. To predict the future of DRAM, one can find useful hints in the oil industry.

Can Memory Downside Risks Be Blocked? ...Micron's DRAM "SCA"

DRAM semiconductor (left) and petroleum by Micron. Photo by Pixabay

The 16 SCAs that Micron has signed are even more binding than traditional long-term supply agreements. Specifically, Micron has pre-negotiated both the volume and price of DRAM it will supply to customers over the next three to five years. The key point here is the "price band"—the SCA sets the maximum and minimum prices for DRAM. As a result, regardless of the future state of the semiconductor market, Micron will not have to slash prices below a certain level.

The volume secured through these agreements accounts for 20% of total DRAM production, 30% of NAND production, and about 25% of total sales. Furthermore, by introducing a "take or pay" method, Micron has secured up to USD 22 billion in cash deposits and financial business agreements to ensure contract execution. This amount is freely available for Micron to use. The provisions are generous to the extent that, compared to customers, the DRAM supplier Micron could be considered to have a contractual advantage.

Most importantly, this means that for the next several years, DRAM prices cannot fall below a certain level—a positive development. Memory semiconductors have been infamous for their harsh cycles: during so-called "super cycles" with soaring prices, operating profits would skyrocket, but once a downturn hit, DRAM manufacturers would be forced into a fierce "chicken game" to survive. If the SCA model spreads industry-wide, it could rescue DRAM from the curse of extreme cycles.

Can Memory Escape the Cycles? ...Experts Say "Downward Pressure if Spot Market Falls"

Micron's U.S. Semiconductor Plant. Micron

But is the SCA sufficient to free DRAM from its cyclical fate? In reality, Micron's SCA is already a common practice in the oil and gas industry, often referred to as the "Collar strategy." In simple terms, this contract sets both upper and lower price limits, protecting customers from sudden surges while allowing producers to control the risk of sharp declines. In the crude oil futures market, this is done by trading call (the right to buy an asset in advance) and put (the right to sell) options.

Experts find the SCA very familiar. Geoff Karen, Chief Information Officer (CIO) of the hedge fund Energy Group Capital, told The Asia Business Daily, "The contracts signed between Micron and DRAM customers are, in essence, no different from a collar strategy."

CIO Karen explained, "Micron did not disclose the specific price band of the SCA, but if the DRAM spot (market) price rises above the upper limit of the band, customers can purchase at a cheaper price; conversely, if the spot price falls below the lower limit, Micron can sell at a higher price. This is a very common practice in the oil market. Both producers and customers in the oil industry sacrifice some potential gains to control risk."

Example of the Collar strategy in the crude oil futures market. It is a risk hedge measure that limits extreme price surges and drops. CME Group website

However, there are significant differences between Micron's SCA and the oil market's collar strategy. CIO Karen emphasized, "Oil buyers purchase oil or gas on an exchange, and oil prices are influenced by various speculative forces." In fact, the commodity futures market sees participation from a variety of financial institutions, such as hedge funds, seeking arbitrage, which can result in high short-term volatility.

In contrast, the DRAM market does not have such a highly developed financial market like oil futures. CIO Karen noted, "While oil producers negotiate prices with faceless speculators, Micron deals directly with customer companies on a one-on-one basis," predicting that the spot price will have a strong influence. He further anticipated, "If the spot price drops below the lower bound of the SCA's negotiated price, customers like Google will demand to renegotiate with Micron." This suggests that the SCA alone may not be enough to shield against the downside risks of a super cycle.

"For Structural Change in Memory, Supply-Demand Management Must Be More Sophisticated"

High-performance memory semiconductors by SK hynix. SK hynix

In other words, while the SCA is positive in that it allows Micron to receive cash deposits from customers in advance, there are still questions about whether it can protect against downward price pressure if the memory semiconductor market enters a slump in the future.

Ultimately, whether DRAM can break free from its traditional cycles and be valued in a new way will depend on whether the artificial intelligence (AI) boom can be sustained. According to market research firms, the sharp increase in memory prices is expected to continue at least through early next year.

Global market research firm Counterpoint has analyzed that in the first half of next year, the global memory market will exceed 2,000 trillion won, with server memory—essential for AI—expanding its share to 57%. However, it also left open the possibility that prices could be adjusted in the latter half of the year as supply increases. Counterpoint emphasized, "For the current growth to become a structural change rather than a temporary boom, more sophisticated supply-demand management will be necessary."

This content was produced with the assistance of AI translation services.