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The state of affairs with Polysilicon:
An investor's guide to
An investor's guide to
Global warming is juicing the price of a key ingredient used to make solar panels, raising questions about what the longer-term impact of the current shortage will be.
Polysilicon is an essential raw material in the production of solar cells for panels that convert sunlight to electricity for homes, businesses and farms.
Since 2004, average contract prices for securing long-term supplies of polysilicon have skyrocketed, more than doubling to $70 per kilogram.
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 (JASO : ja solar holdings co ltd spon adr 42.45, +1.35, +3.3%) ,
SunTech Power Holdings (STP : suntech pwr hldgs co ltd adr 42.90-0.22-0.51% 12:26pm 07/13/2007)
CSIQ10.75, +0.45, +4.4%) 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. (ESLR :
evergreen solar inc com
Last: 10.30+0.35+3.52%ESLR 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. (WFR :
MEMC Electronic Materials, Inc
Last: 62.75+0.11+0.18%WFR62.75, +0.11, +0.2%) , which received a warrant equal to a 4.9% stake in SunTech.
Delayed quote data
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.
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
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:
"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.
Humble beginnings: semiconductor waste
China’s solar energy industry began in the mid-1980s when Semiconductor companies in Wuhan, Ningbo, Kunming, Xining, Chengdu and other Chinese cities began manufacturing solar cells using a P-N knot diode process with waste raw material from wafer production.
Equipment acquisition: 1985-1990
During the early stages of industry development, China companies began to acquire solar cell manufacturing equipment.
By 1990, Chinese companies had established a primary solar cell industry with a total of 4.5 MWp manufacturing capacity.
Technology advances: 1990-2000
Beginning in 1990, the industry entered a decade of development.
Following the period of equipment import and technology adoption, the industry leaders began to adapt and innovate solar technology. Production of solar cells increased as technology and manufacturing processes developed and improved.
By 2000, the industry could almost fulfill China‘s domestic market demand, although there was very little export.
2000: Rapid growth and development of solar energy supply chain
Beginning in 2000, China’s solar energy industry entered a period of rapid growth:
Between 2003 and 2006 market demand in Europe (especially Germany) began to grow rapidly. Wuxi Sun Tech and Tianwei Yingli Solar expanded their capacity to meet demand, and more companies began to build solar cell manufacturing production lines.
Table 1: China solar cell
capacity, year-end 2006
With solar cell manufacturing as its starting point, China began to develop a comprehensive solar industry supply chain, which includes polysilicon material, ingot or wafer manufacture, solar cell manufacture, cell module and cell system, etc. In addition, the solar cell industry supply chain brought with it the development of related industries such as materials, equipment, and components for solar cells.
The rest of this whitepaper will focus on China’s efforts to advance its solar energy industry by developing and promoting an independent supply of polysilicon, the raw material for the industry.
Global polysilicon industry overview
In 2006, global polysilicon material production stood at about 36,000 tons, with the top seven manufacturers contributing over 90% of production. Of that, over 18,000 tons of polysilicon were supplied to the solar industry, with the rest supplying the semiconductor industry.
Because of rapid development of the world solar industry, the shortage of polysilicon material is becoming increasingly tight.
As a result of the tight global polysilicon supply, polysilicon prices are rapidly increasing. From 2001 to 2003, the semiconductor polysilicon purchase price was about US$40 per kilogram and the solar grade polysilicon price was about US$25 per kilogram in China.
In 2005, the average contract price of polysilicon was over US$50 per kilogram and the average retail price was over US$100 per kilogram. In 2006, the contract price was about US$100 per kilogram and the retail price was over US$300 per kilogram in China.
Currently, polysilicon manufacturing is dominated by seven global leaders. The output of these companies has long lagged behind solar cell demand for numerous reasons, including technology and market monopolization and time required for production expansion. The polysilicon shortage has become the bottle-neck of the solar industry development.
We do not expect the shortage of polysilicon to be resolved before 2011. The shortage not only limits the development of solar cell production, but increases solar cell manufacturing costs, thus having an overall seriously negative effect on the development of the global solar industry.
China polysilicon industry overview
At the end of 2006, China’s polysilicon production capacity was about 500 tons.
Table 2. China polysilicon capacity (2006)
However, production only reached around 230 tons, while demand reached 4,380 tons. As a result, over 95% of China’s polysilicon demand was imported in 2006.
Table 3. China polysilicon production and
demand, 2004-2006 (tons)
Development potential of China polysilicon industry
If China is to develop the capacity to fill its polysilicon demand, it will need to overcome several obstacles:
The major challenge of China’s solar energy and information technology industries is developing polysilicon manufacturing technology. The major international polysilicon manufacturers who monopolize the advanced technology required for polysilicon production have to date not been willing to transfer production technology to China. As a result, China polysilicon manufacturers have been forced to invest in developing their own production technologies.
Nevertheless, several Chinese companies have begun investing in polysilicon production technology and capacity expansion.
As of 1Q07, Luoyang Zhonggui and Emei Semiconductor have begun their planned polysilicion manufacturing capacity expansions.
Sichuan Xinguang Silicon Industry began manufacturing solar and semiconductor polysilicon on February 26, 2007 and now has the largest polysilicon production line in China. As a result, China is on its way to becoming the fourth country to achieve polysilicon manufacturing capacity of over 1,000 tons per year, following Germany, Japan, and the United States.
Other polysilicon production projects are also currently under way in China, including construction projects at Yunnan Qujin, Hubei Yichang, and other companies.
If all of the currently planned projects come to fruition, China’s polysilicon manufacturing capacity will reach 12,660 tons in 2011 and China’s polysilicon shortage will be resolved.
Table 4. China polysilicon vendors’ production
Table 5. Polysilicon construction plans and
planned capacity (2004-2011)
We expect China’s government to continue to support the development and expansion of polysilicon local technology development and production. China’s 2005 Renewable Energy Law called for the country to increase its renewable energy consumption to 10 percent of the total by 2020. Without sufficient supply of domestic polysilicon, this goal, as well as solar cell export goals, will be difficult to meet. Going forward it appears clear that polysilicon will remain a good investment in China in the near future.