North Coast Solar Stocks

November 22, 2008

Polysilicon prices fall to earth

Filed under: CSIQ, DOW, GLW, JASO, SOLF, STP, TSL, WFR — Tags: , , , , — Jason @ 1:21 pm

Credit crisis hits biggest end-users, the solar-panel makers

By Laura Mandaro, MarketWatch
Last update: 1:21 p.m. EST Nov. 22, 2008

SAN FRANCISCO (MarketWatch) — Prices of polysilicon, already pressured by a coming supply glut, are tumbling fast as the credit crisis drives down demand for the solar panels that are the biggest users of the raw material.

polysilicon-projectionsPolysilicon — a sand-derived crystalline material that helps turn sunlight into electricity — has fallen swiftly on the spot market in past months, dropping to about $200 per kilogram from $450 to $500 earlier this year, say analysts and solar-module makers.

And they are likely to fall even further as a flood of new polysilicon supply makes its way out of production, encouraging solar-panel makers to renegotiate contracts that account for the bulk of their materials purchases.

Jeff Osborne of Thomas Weisel Partners expects spot prices to sink below $100 by the end of 2009 and to a $50 to $80 range in 2010, or roughly the same levels as prices in long-term contracts.

Such a drop marks a stark reversal in the cost situation solar-panel makers have faced for the past four years, when polysilicon prices surged and would-be buyers often had trouble finding enough product.

Polysilicon, once mainly used by semiconductor makers, became a hot commodity after global warming concerns and energy prices caused a boom in demand for solar panels.

But declining costs may not be enough to bring back investors to solar-module makers such as JA Solar Holdings (JASO) , Suntech Power Holdings (STP) , Solarfun Power (SOLF) , Trina Solar Ltd. (TSL) and Canadian Solar Inc. (CSIQ).

Stocks of solar-panel makers and their silicon suppliers sold off sharply last week on concerns that the credit crunch was causing investors to shelve new solar-development projects.

“Right now the solar industry is a call option on the credit crisis,” said Osborne, referring to a derivative whose value reflects changes in the underlying instrument.

“Until lending frees up, I think prices across the whole value chain will continue to fall,” he said.

On Thursday, Suntech slashed its revenue forecasts for the fourth quarter, blaming the euro’s sudden fall against the dollar and delayed orders by customers who had trouble getting project financing.

Financing troubles are pressuring prices throughout the supply chain, from solar-panel end products to the polysilicon raw material.

Shares of big polysilicon supplier MEMC Electronic Materials (WFR) , of St. Peters, Mo., fell 26% last week.

“In order to manage and avoid more losses, some solar panel manufacturers are going to polysilicon suppliers and saying, ‘if you don’t lower prices I’ll go out of business,'” said Mehdi Hosseini, an analyst at Friedman Billings Ramsey.

Pressure to renegotiate polysilicon contracts will weigh on margins at the established polysilicon manufacturers such as MEMC, Germany’s Wacker Chemie AG and Norway’s Renewable Energy Corp. (RNWEF) . But Hosseini says these firms should survive the swift drop in spot prices because they have low cost structures and lots of long-term contracts.

The coming glut

The real shake-out, Hosseini and others say, will come among the 60 or so new companies that have entered the polysilicon market in the past two years. In the past, just seven suppliers made up 90% of the market for polysilicon, including Dow Corning (GLW) (DOW) joint venture Hemlock Semiconductor Corp.

Heightened production from the new and established firms will help turn what’s been a shortage in polysilicon into an excess by 2010.

Next year, global supply of polysilicon will double, outpacing demand growth of 34%, says iSuppli. In two years, supply will outstrip demand. That gap will widen by 2012. Producers in Asia, largely thanks to new Chinese entrants, will produce about 40% of the world’s supply, up from one-third currently.
Demand, while growing until 2011, won’t keep up.

“We forecast severe imbalances because the ramp rates are so different,” said Stefan de Haan, a senior analyst for iSuppli in Munich.

Starting in 2012, predicts the research firm, the collapse in polysilicon prices caused by the flood of new output will force consolidation among the roughly 70 producers of the raw material.

Cost cuts

For solar companies, a drop in the cost of polysilicon is good news. The solar industry is on track to pass the chip industry as the biggest user of polysilicon. The raw material is the single biggest expense in making a solar module, representing about half of its costs.

But such cost relief is running up against a slowdown in demand for solar products resulting from the global credit crunch.

With an estimated 70% to 80% of solar projects financed by banks and institutional investors, these solar panel makers rely on credit to ensure their customers can place new orders.

“You’ve got illiquidity in the credit markets and lack of project-finance capital impeding the ability for project developers to purchase solar panels,” said Michael Carboy, a solar stocks analyst at Signal Hill Group.

Suntech CEO Zhengrong Shi said Thursday that banks had taken a “more conservative approach” to solar investments, he said.

Panel prices, which rose for the first nine months of this year, are on track to fall as much as 15% in the fourth quarter, says Friedman, Billings Ramsey & Co.

And some solar-panel makers are not likely to get cost relief immediately.

In an attempt to ensure supply when the industry was sold out of the raw material, some entered into at least five-year contracts with polysilicon producers at high prices. Now they are trying to renegotiate these contracts lower.

“Many of these companies have cost structures where they’re locked into long term supply at higher prices than where current market is today,” said Thomas Weisel’s Osborne.

Laura Mandaro is a reporter for MarketWatch in San Francisco.

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