Yesterday afternoon, MEMC Electronic Materials (WFR) disclosed in an SEC filing after the closed that it had struck a revised silicon wafer supply agreement with Suntech Power (STP) which cuts the price Suntech is paying per wafer, but increasing volume to maintain the revenue targets under the deal for both 2009 and for the remainder of the 10-year deal, which was struck in 2006.
The revised agreement is a symptom of a key underlying dynamic in the solar industry: collapsing prices for raw polysilicon in the face of dramatically increasing supply. In a comprehensive report on the subject this morning, Collins Stewart solar analyst Dan Ries notes that spot market poly prices have fallen from a peak of about $450/kg in mid-2008 to the $130-$150/kg range more recently. That’s a pretty dramatic move - but the decline is far from over.
Ries contends that spot prices by mid-2009 will plunge to the $40-$60/kg level, due to a severe oversupply. As the solar industry has blossomed over the last few years, margins exploded for the poly manufacturers like MEMC, drawing in a host of new players. Capacity expansion has boomed, and now appears to be well in excess of demand. Ries estimates that in 2009, polysilicon production will reach 80,300 metric tons, 49% more than his demand forecast of 53,905 tons. That’s a surplus of 26,395 tons. He sees the surplus in 2010 rising to 48, 785 tons, as demand grows 22% while supply increases 43%.
The way Ries see it, oversupply will continue until some production capacity is taken off line. For that to happen, he says, prices will need to drop below $60/kg, roughly the marginal cost for the highest-cost producers.
Unfortunately, he notes, demand elasticity in the short-run will be low. Since silicon is a very small percentage of the production costs for chip makers, it won’t make much of a dent at all there. In the solar business, there could be enormous price elasticity in the long run - but he sees a lag of about 9 months. Meanwhile, he says, solar company revenues will “suffer” as ASP erosion offsets modestly higher volume. “Until a new equilibrium is reached, which could take a year, the detrimental effects of deflation will outweigh the benefits of lower priced polysilicon for module suppliers,” he writes.
The silver lining here is that in the long run, much lower prices for polysilicon are the most direct way to bring down solar electricity production costs low enough to compete with conventional utility scale power generation. With poly in the $40-$60/kg range, he says, module prices would drop to the $1.70-$2/watt range, and utility scale projects could produce power for 11 cents/watt. At that rate, he says, solar would be “reasonably competitive” with combined cycle natural gas facilities and wind turbines. “A significant market would open and drive a wave of growth for the industry,” he says. “In the long-term, a collapse in polysilicon would be extremely positive for the industry,” but only after a “difficult adjustment period with falling prices and negative growth.”
This could be an especially scary situation for MEMC, which is basically a pure play on prices for poly and silicon wafers. He has a Hold rating on the stock.
Ries has a Sell rating on Suntech, Hold ratings on Canadian Solar (CSIQ), JA Solar (JASO) and Solarfun (SOLF), and a Buy rating on First Solar (FSLR) and Yingli Green Energy (YGE). He also notes that a huge drop in pricing could be a boon for solar installers, including Europe’s Phoenix Solar (PS4.DE.)
He also notes that while he likes Yingli as a prime beneficiary of lower poly prices, he also notes that the company is in the process of building its own poly facility, “which given the polysilicon environment may not provide the company with an economic return during its first year of operation.” On First Solar, he points out that lower poly prices has negative competitive implications, reducing the company’s cost advantage against its silicon-based competitors.
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The revised agreement is a symptom of a key underlying dynamic in the solar industry: collapsing prices for raw polysilicon in the face of dramatically increasing supply. In a comprehensive report on the subject this morning, Collins Stewart solar analyst Dan Ries notes that spot market poly prices have fallen from a peak of about $450/kg in mid-2008 to the $130-$150/kg range more recently. That’s a pretty dramatic move - but the decline is far from over.
Ries contends that spot prices by mid-2009 will plunge to the $40-$60/kg level, due to a severe oversupply. As the solar industry has blossomed over the last few years, margins exploded for the poly manufacturers like MEMC, drawing in a host of new players. Capacity expansion has boomed, and now appears to be well in excess of demand. Ries estimates that in 2009, polysilicon production will reach 80,300 metric tons, 49% more than his demand forecast of 53,905 tons. That’s a surplus of 26,395 tons. He sees the surplus in 2010 rising to 48, 785 tons, as demand grows 22% while supply increases 43%.
The way Ries see it, oversupply will continue until some production capacity is taken off line. For that to happen, he says, prices will need to drop below $60/kg, roughly the marginal cost for the highest-cost producers.
Unfortunately, he notes, demand elasticity in the short-run will be low. Since silicon is a very small percentage of the production costs for chip makers, it won’t make much of a dent at all there. In the solar business, there could be enormous price elasticity in the long run - but he sees a lag of about 9 months. Meanwhile, he says, solar company revenues will “suffer” as ASP erosion offsets modestly higher volume. “Until a new equilibrium is reached, which could take a year, the detrimental effects of deflation will outweigh the benefits of lower priced polysilicon for module suppliers,” he writes.
The silver lining here is that in the long run, much lower prices for polysilicon are the most direct way to bring down solar electricity production costs low enough to compete with conventional utility scale power generation. With poly in the $40-$60/kg range, he says, module prices would drop to the $1.70-$2/watt range, and utility scale projects could produce power for 11 cents/watt. At that rate, he says, solar would be “reasonably competitive” with combined cycle natural gas facilities and wind turbines. “A significant market would open and drive a wave of growth for the industry,” he says. “In the long-term, a collapse in polysilicon would be extremely positive for the industry,” but only after a “difficult adjustment period with falling prices and negative growth.”
This could be an especially scary situation for MEMC, which is basically a pure play on prices for poly and silicon wafers. He has a Hold rating on the stock.
Ries has a Sell rating on Suntech, Hold ratings on Canadian Solar (CSIQ), JA Solar (JASO) and Solarfun (SOLF), and a Buy rating on First Solar (FSLR) and Yingli Green Energy (YGE). He also notes that a huge drop in pricing could be a boon for solar installers, including Europe’s Phoenix Solar (PS4.DE.)
He also notes that while he likes Yingli as a prime beneficiary of lower poly prices, he also notes that the company is in the process of building its own poly facility, “which given the polysilicon environment may not provide the company with an economic return during its first year of operation.” On First Solar, he points out that lower poly prices has negative competitive implications, reducing the company’s cost advantage against its silicon-based competitors.
[SigmaForex Bonus Revolution]
Have you ever imagined that even the hardest times can lay your interest?
You may now wonder and asking yourself how it can be done while we live the toughest time in our economic world. All imagine that we have reached the top of the crisis and will remain there for a cloudy time, which has been specified predictably by the economic experts.
But what if you have the key for passing by all that?
Actually the key solution is within your hands! But what happened is that you have got blinded with the shock of unexpected financial crisis that extends its arms to hold the entire economic world for a not specified time. All what you need is some confidence and a helping hand guiding you to a real bright path.
Almost all successful people have learned how to make their own interest even from their own loss! Just some confidence and resistance, and above all the choice of the right hit at the right time. It is a common goal for money makers to have a continuous ability of preserving their financial status. So, stop thinking of the goal only and start thinking of the way you are going to do it, and ask yourself how can I still make the amount of money I was doing before even in the worst time in economic history?
One of the most necessary steps in your thinking and performance is not to take a long time in thinking and planning to be able to catch the chances available in the market, especially at this time. This doesn't mean to be rash, but to be selective and have the deepest insight.
In reversing the situation for the sake of your own interest, SigmaForex has strived to think and produce the best solution for money makers in FOREX through it's three types of accounts.
The motto of SigmaForex is "Not only physical power that can make you win, it is the power of mind that helps you the most to make the best living in all its sides".
The second step you need to go through after thinking is to apply the principle of "use the useless for your usefulness", by catching the best chances available. And here in speaking about the chances, Sigma Forex offers three unique business accounts with three bonus budgets existed nowhere else and we called it"The Bonus Revolution"
Enter Now The Bonus Revolution
