Not lucky
enough to have a long-term contract? Spot-market prices for polysilicon are
daunting: Expect to pay $200 per kilogram on the spot market, compared with the
$150 paid in 2006, according to industry watchers.The supply
crunch has thrust the polysilicon business -- once the all but exclusive
territory of semiconductor makers -- into high gear. Novel financing deals and
new partnerships are afoot, with solar-module makers scrambling to secure
long-term deals and chemical manufacturers scrambling to boost factory output by
2008 and beyond.To ensure a
steady supply of polysilicon, JA Solar Holdings, SunTech Power Holdings, Canadian Solar Inc.and others have dedicated much of their IPO proceeds to purchases of the
raw material.The deals,
called "pre-payments," are being used by polysilicon makers to boost production.The
situation is more acute for some solar companies than others.Faced with
escalating prices and tight supplies, two companies have swapped equity for
polysilicon in pacts to help future sales. Those deals have raised eyebrows.South
Korea-based DC Chemical Co. acquired a 15% stake in Massachusetts-based
Evergreen Solar Inc. in a supply pact that runs through 2014. In another deal, China-based
SunTech Power inked a 10-year supply pact with MEMC Electronics Materials Inc., which received a warrant equal to a 4.9% stake in SunTech.The
Evergreen-DC Chemical deal, in particular, carried a "steep price to pay for
polysilicon supply," said Jeff Osborne, an analyst at CIBC World Markets, which
has helped take a number of solar companies public.In
mid-April, Evergreen agreed to issue 4.5 million shares of restricted common
stock and 625 shares of restricted preferred stock to DC Chemical, which bought
3 million shares of Evergreen at $12.07 each. Under the supply deal, Evergreen
is to receive enough polysilicon to make roughly one gigawatt of photovoltaic
solar panels through 2014.
Supply crunch
The supply
crunch is exerting collatetal pressure on the semiconductor industry, which has
long been the primary buyer of polysilicon, the chief material used to make the
wafers onto which microchips are stamped."Global
warming is not good for the semiconductor industry. The solar industry is
growing very rapidly. ... It's really created demand in past several years that
wasn't there before," said Tom Linton, who negotiates polysilicon deals for
Freescale Semiconductor, one of the world's larger chip manufacturers.This has
changed the chip-making business's mindset
Polysilicon
crunch A number of solar panel
makers have gone public the past 18 months. Many earmarked IPO proceeds for
polysilicon in deals called "pre-payments."
Company
Ticker
IPO proceeds
Polysilicon pre-pays
JA Solar
JASO
$259 mln
$120 mln
SunTech Power
STP
$455 mln
$100 mln
Canadian Solar
CSIQ
$ 115 mln
$30 mln
SolarFun Power
SOLF
$150 mln
$50 mln
Trina Solar
TSL
$107 mln
$30 mln
Data: Thomson
Financial / company reports
.Before the
solar companies came onto the scene in a big way, chip firms usually inked
three- to six-month supply contracts with polysilicon producers. Now "you've
started to see that elongate towards one- or multi-year contracts," said CIBC's
Osborne.The solar
market's big polysilicon push came in 2006. For the first time ever, solar-panel
makers consumed as much polysilicon as did the chip manufacturers, purchasing
more than 50% of the silicon wafers produced in 2006 -- up from 10% in 2000,
according to industry sources.Polysilicon
prices weigh more heavily on solar-panel makers, with the raw material making up
40% to 45% of the cost of goods per solar cell, compared with just 3% to 7% for
a microchip. For that reason, solar-panel makers typically seek six- to 10-year
supply contracts, Osborne reported.The
polysilicon shortage has stunted the growth of the solar industry, keeping it
from expanding faster than the 20% pace it set in 2006, based on the number of
installations worldwide. Yet a long-running supply-demand imbalance cannot be
assumed, with forecasting polysilicon-market dynamics tricky and growing
trickier.For
solar-panel manufacturers, future needs hinge on a number of questions:
How fast will solar take off in the U.S., Spain and other countries beyond
Germany and Japan, the world's two biggest solar-installation markets?
How fast will solar-panel prices drop versus the price of electricity?
Will other solar technologies challenge the primacy of polysilicon?
"You have
some questions there," said Jesse Pichel, an analyst at Piper Jaffray, which has
helped raise money for solar-panel makers. "No one is really sure how it will
play out."Such
factors and others make it "difficult to accurately estimate polysilicon demand
for photovoltaic production," agreed Gartner Inc. analyst Takashi Ogawa, who
forecasts worldwide polysilicon demand.
Alternatives in
alternative energy
MEMC,
Hemlock Semiconductor, Renewable Energy Corp. and DC Chemical are all building
or expanding manufacturing sites in a bid to relieve supply pressure. Meanwhile,
new entrants are also moving into the market, as 88% of the polysilicon supply
is currently controlled by five players.It takes at
least two years to construct a polysilicon factory, which cost between $500
million and $1 billion. "The reality is [that] some of these plants may be
significantly delayed, and some of the polysilicon makers maybe overstating
their plans," Pichel said.By 2010,
global polysilicon available for sale is expected to reach 99,500 metric tons,
up from 35,400 metric tons in 2006, according to CIBC's latest forecast, issued
in late April, which estimates 25% more polysilicon will be available in 2010
than its prior projection.CIBC
estimated an "acute shortage" through 2008. Relief could come in 2009 at the
earliest, in CIBC's view.But the
supply shortage has inspired exploration of alternative solar technologies that
don't rely on polysilicon, such as thin-film panels. Whether such alternatives
demonstrate efficacy and whether the most ambitious polysilicon-capacity
buildouts come to fruition will ultimately have a great deal to do with whether
the polysilicon crunch tightens or turns into a glut.
