4/8/13 Chlebina Cam: Korea's Memory Headache

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Recently, there has been an escalation of tensions in the Korean peninsula as North Korea’s young new leader agitates against the South and its ally, the United States.  Last week, the North Korean propaganda machine released a picture of their new leader plotting strategy with his generals.  In the background was a purposeful placement of a map of the U.S. showing a handful of proposed missile strikes.  Besides the obvious targets of Washington DC and two cities on the west coast, the only other target was Austin Texas….  Why Austin Texas?   Well, it turns out that Austin Texas is home to a large South Korean Logic Fab.  So, this map actually gives us a tip to the North’s thinking on high value targets and what may be South Korea’s and the world’s vulnerability to any potential conflict…… MEMORY.

As it turns out, over half of the world’s solid state memory (DRAM and NAND flash) is produced in South Korea within 85 miles of the DMZ.  In fact, the world’s largest fab was just added last year to the biggest memory fab complex in the world.  That latest fab is over 12 stories tall and cost over 10 billion dollars.  Few believe that North Korea has the capability to hit the U.S. with a missile strike, but no one doubts that they have thousands of short range missiles that could take out every one of the South’s memory fabs.  Doing so would cause huge damage to the South’s economy as the largest producer of memory consumes most of their output for their own electronic devices such as smart phones and computers.  Recent reports have pegged their electronic product sales equivalent to 17% of South Korea’s GDP.  Without their memory, sales of most of their electronic products would grind to a halt.

We have to believe that this big South Korean producer is scrambling to facilitate any Fab located outside of the peninsula with memory capacity a.s.a.p. in order to minimize their huge vulnerability.  Also, memory consumers have to be considering the risk to their own end products and will be trying to secure contracts with non-Korean suppliers that have their fabs in countries that are not in a state of war.  We are starting to detect premiums attached to memory products from these producers.

As we have recently shown, memory spot prices have been exploding over the last 6 months due to supply constraints against increasing demand.  Conflict on the peninsula could make these price increases seem tame by comparison as Korea’s memory headache could turn into a migraine for the world’s consumers of memory.

Sincerely,

Larry Chlebina
 
President
Chlebina Capital Management

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