Comment by throwaway2037
5 days ago
> Manufacturers don't actually want too many extremely long term contracts because it would limit their ability to respond to market price changes.
I don't agree with this sentence. Why would not the same apply advice to oil and gas contracts? If you look at the size and duration of oil and gas contracts for major energy importers, they often run 10 years or more. Some of the contracts in Japan and Korea are so large, that a heavy industrial / chemical customers will take an equity stake in the extraction site.
Except silicon, power, and water (and a tiny amount of plastic/paper for packaging), what else does a fab need that only produces DRAM? If true, then power is far and away the most variable input cost.
> Why would not the same apply advice to oil and gas contracts?
Because oil & gas suppliers only ever sell one product, and memory fabs can dynamically switch product mix in response to supply & demand to optimize profits. The same sand, power and water can make DDR4, HBM or DDR5
Oil and gas suppliers have several products: gas, diesel, jet a, propane, naptha, asphalt etc.
Aren't the proportions is those essentially static?
9 replies →
The factory must grow
Are you seriously trying to compare raw commodity inputs traded on the futures market to finished semiconductor products that are expected to become deprecated, uncompetitive and/or EOL'd in a few years?
Yes it looks like he does. And I don't see why not. The fact that their products become deprecated, gives even more incentive to manufacturers to want long term contracts.
Now do a comparison to hog or corn futures
Same does apply to gas contracts. So many a time LNG companies break contracts and pay hefty penalties if the spot rate is high enough.
>So many a time LNG companies break contracts and pay hefty penalties if the spot rate is high enough.
What do you mean "Break contracts"? I thought the conversation was about Futures contracts, you don't break them. You sell your contract or you take/give delivery (or cash settle).
There's no specific mention of futures upthread of this comment.
Not all gas is sold by futures, you can have a contract for, say, delivery of 20 million cubic metres of gas a year and a penalty if that isn't met. Some people actually want the gas for gas-related purposes rather then as a financial phantom.
Same for DRAM - Dell actually wants the chips to put in computers, an economic abstraction doesn't help much when you need to ship real computers to get paid, and many customers aren't in the market for a laptop future (Framework pre-orders notwithstanding).
As I understand hydrocarbon trading (oil and gas), futures is a tiny portion of the settled market. The vast majority is traded through long-term, privately negotiated contracts. As I said previously, many of those contracts are so large that the end buyer takes an equity stake in the extraction site.
> Except silicon, power, and water
Various chemicals too, https://haz-map.com/Processes/97
Great point. You are the only one who mentioned this! Example: photoresist film.
> Except silicon, power, and water (and a tiny amount of plastic/paper for packaging), what else does a fab need that only produces DRAM? If true, then power is far and away the most variable input cost.
Borrowing costs can be wildly variable and are the main cost of making silicon. All the "inputs" over the lifecycle of a fab are so completely dwarfed by the initial capital costs that you can pretty much ignore them in any economic analysis. The cost of making chips is the cost of borrowing money to pay for capital costs, and the depreciation of the value of that capital.
This theory sounds nice, but do you have any sources to share? For example, I assume a fab runs for about 20-30 years. The labor inputs must be very high over this period. Basically, there are no poorly paid people inside a fab. And wouldn't "wildly variable borrowing costs" also affect oil and gas who need to finance the research phase and construction of the plant?
> For example, I assume a fab runs for about 20-30 years.
If only.
20 years ago, fabs were being built to use 90nm class technology. Chips made on such an old node are so cheap today it can't pay even fraction of a percent of the capital costs of the plant per year. So all of it's capital has to have been depreciated a long time ago.
The oldest process node in high-volume production for memory is currently 1α, which started production in January 2021. It is no longer capable of making high-end products and is definitely legacy, and also has to have essentially depreciated all of the capital costs. The time a high-end fab stays high-end and can command premium prices, and during which it has to depreciate all the capital is ~3-5 years. After that either you push the plant to produce legacy/low price and low margin items, or you rebuild it with new tools with costs >$10B.
Also, even if fabs did last 20-30 years, the capital costs would dominate.
> And wouldn't "wildly variable borrowing costs" also affect oil and gas who need to finance the research phase and construction of the plant?
I don't understand? Nothing else costs anywhere near as much capital to produce than silicon chips. Thanks to the inexorable force of Moore's second law, fabs are machines that turn capital investment into salable product, nothing like it has ever existed before.
Micron Fab 6 is about 2300 staff (including 1000 contractors).
Even if you pay them all 500k per year, that's "only" about a billion a year in payroll.
The New York fab plan costs something like 20 billion more or less now to build, with 100 billion over 20 years.
Also, maybe the calculus is different right now in the US, but it used to be the semiconductor workers were expected to have PhDs coming out of their ears but were not actually paid very well, with salaries in Taiwanese fabs being around the $50-60k mark, and lower paid workers being more like $20k or less. Presumably US fabs will be automated to an even greater extent due to labour costs.
So it's very possible that servicing debt on the capital outlay is substantially more expensive than the payroll.