Hard drive prices settle in at 70 percent above the pre-flood level

Thailand floods are a distant, painful memory, but two hard drive legacies endure: much higher prices and record profits

Floods in central Thailand last October knocked out 25 percent of the world's hard drive manufacturing capability. Western Digital's plant in Ayutthaya was completely inundated. It took seven weeks to start production again. By contrast, Seagate's plant in Thailand wasn't in the flood plain, but several of its subcomponent suppliers took a hard hit.

With thin supply stocks and high demand, hard drive prices went through the roof. Then a bit of sanity prevailed and prices settled back -- a bit.

As I reported in December, the price of a Western Digital 2TB Caviar Green 20EARS at Newegg went from $69.99 before the flood, up to $249.99 in less than a month, and back down to $162.99 by December, two months after the flood hit. Western Digital's production, which was knocked out for seven weeks, went back onstream six months ago, and that same drive today sells for $119.99, a whopping 70 percent increase from preflood prices.

Seagate, which wasn't hit directly, traces essentially the same price curve. The Seagate 2TB Barracuda Green ST2000DL003 at Newegg went from $69.99 before the flood to $229.99 two weeks later. Now, it too sells for $119.99 -- an identical 70 percent price increase to Western Digital's.

What happened? Supply may be at or near preflood levels, but demand hasn't fallen off at all. No doubt manufacturers have learned a very painful lesson and locked in long-term contracts. You and I get to buy the leftovers, and they don't come cheap, so Western Digital and Seagate are making hay while the sun shines.

Western Digital reported sales in the quarter ending March 31, 2012, at $3.04 billion, with $483 million in net profit, for a net margin of 16 percent. CEO John Coyne says, "The recovery activities related to both WD operations and those of our supply chain partners impacted by the Thailand floods have reached the point where we now have the capability to adequately meet anticipated customer demand in the current quarter and beyond. Our subsidiaries are now focused on profitably serving customer needs in terms of both mix and volume."

Seagate reported sales in the quarter ending March 31 at $4.45 billion with a net profit of $1.15 billion, for a net margin of a little more than 25 percent. CEO Steve Luczo says, "As expected, pricing was relatively benign in the quarter and Seagate's operational performance exceeded our expectations.... Distribution pricing remains well above historical spreads with respect to OEM pricing."

I guess "benign" depends on perspective.

Both of those are record profits, by the way. According to Ycharts, both companies just experienced the highest gross profit margin either has had in the past 10 years. Western Digital's stock bottomed at 22.64 on October 20; it's now around 33.50, up 48 percent. Seagate struck bottom on October 4 at 9.05. Eight months later it's up to 25.55 or so, an increase of 182 percent.

Also, consolidations are in full swing in the hard drive industry. Earlier this month, Western Digital completed its acquisition of Hitachi's hard drive manufacturing arm. The Hitachi operation cost $4.3 billion in cash and a little under $1 billion in stock. Last December, Seagate bought Samsung's hard drive operation for $1.4 billion in stock and cash. Fewer competitors equal higher prices.

iSuppli notes another reason for the gaudy profit margins: "Shipments for hard disk drive units in Q4 2011 and Q1 2012 were approximately 29.1 percent and 16.6 percent lower than the pre-Thailand flood number of 174 million in Q3 2011. However, the average selling prices in the post-flood timeframe were approximately 28 percent higher than in the pre-flood period in both quarters." Lower volume also equals higher prices.

My prognosis? Prices aren't going to come down any time soon. Both big names are sitting on contracts that aren't going to spur any steep downward retail trends. Get used to it.

This story, "Hard drive prices settle in at 70 percent above the pre-flood level," was originally published at InfoWorld.com. Get the first word on what the important tech news really means with the InfoWorld Tech Watch blog. For the latest developments in business technology news, follow InfoWorld.com on Twitter.

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