SK Hynix has reportedly removed the price cap from its long-term supply contracts for memory chips, according to a July 1 report by the Taiwanese IT news outlet DigiTimes. This move is expected to yield a greater price increase effect compared to competitors amid rising demand for artificial intelligence (AI) semiconductors.
The report indicates that SK Hynix has not set a price cap in its recent long-term agreements (LTA) with clients. This strategy differs from competitors like Micron, which typically establish price caps in their long-term contracts. As a result, SK Hynix has become the only memory manufacturer currently operating long-term supply contracts without a price cap, allowing it to fully reflect spot price increases in contract prices while securing long-term customer volumes in line with growing AI demand.
Typically, long-term memory contracts involve suppliers setting price caps to limit profit margins in exchange for guaranteed volumes from customers. However, SK Hynix has extended contract durations to lock in customer demand while eliminating price caps, thereby enhancing its profit elasticity during future price increase cycles, DigiTimes reported. Both SK Hynix and Samsung Electronics have extended their long-term supply contract periods from the previous one year to between three and five years to secure sustained demand.
A report released the previous day by Korea Investment & Securities echoed similar sentiments. The report analyzed Micron's strategic customer agreements (SCA), noting that SK Hynix has set only a price floor without a cap, with LTA durations extending to three to five years per customer. This trend reflects a structural change in the memory business model.
In contrast, Micron is said to maintain price caps in its long-term contracts. On June 25, Micron announced that the price caps for 16 strategic customer agreements would be linked to market prices in the second quarter of 2026. Some market observers interpret this as limiting Micron's potential for future price increases.
However, Micron has reportedly set its contractual price floor significantly above the profitability levels seen during past memory booms, establishing a safeguard for its profitability. Micron's historical gross profit margin peak was around 62%, but it recently reached 84.9%. This suggests that even with the price floor in place, Micron can maintain profitability above levels seen during previous peak periods.
Morgan Stanley analyst Joseph Moore stated that when evaluating the value of contracts, the duration is more important than the price cap. He noted that memory companies' gross profit margins are already nearing 90% and are likely to remain high for an extended period, making it reasonable for customers to seek some level of price protection.
DigiTimes concluded that the differing contract strategies of SK Hynix and Micron illustrate how leading memory companies are strengthening their negotiating power amid the growing demand for AI.
* This article has been translated by AI.
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