Solar Glut Worsens as Supply Surge Cuts Prices 93%: Commodities

By Marc Roca and Ben Sills - Nov 11, 2011 3:02 AM GMT+0700

The cost of solar cells and microchips has nowhere to go but down because of a supply glut for the commodity they’re made from, a brittle charcoal-colored semiconductor baked in ovens at 600 degrees centigrade.

Polysilicon has plunged 93 percent to $33 a kilogram from $475 three years ago as the top five producers more than doubled output, data compiled by Bloomberg shows. The industry next year will produce 28 percent more of the raw material than will be consumed, up from 20 percent this year, said Robert Schramm- Fuchs and Shai Hill, analysts at Macquarie Group Ltd.

“Polysilicon is a grossly, grossly, grossly oversupplied commodity product,” said Paul Leming, director of research at Ticonderoga Securities in New York. “We’re staring at years of stability where polysilicon pricing sits at something approaching cost of production and doesn’t move.”

The shift is squeezing margins for manufacturers led by Hemlock Semiconductor Corp. and Wacker Chemie AG. (WCH) Solar-cell makers that use the material such as JA Solar Holdings Co. and Suntech Power Holdings Co. drove down the cost of photovoltaics, tipping three U.S. manufacturers into bankruptcy this year.

“The solar PV market has certainly reached a point where some illusions are meeting reality,” Wacker Chief Executive Officer Rudolf Staudigl told investors in an Oct. 28 conference call. “About the length of the downturn in polysilicon, I simply cannot answer.”

Cells and Chips

Polysilicon accounts for a quarter of the cost of a finished solar panel. The photovoltaic industry consumes almost 90 percent of the supply, which is also is the foundation of most computer chips made by manufacturers such as Intel Corp. (INTC), the world’s largest.

Lower polysilicon prices will have less of an effect on computer chips because, while the amount used varies between different designs, the material accounts for about 5 percent of the production cost on average, according to Janardan Menon, an analyst at Liberum Capital in London.

“There has been some impact for semiconductor companies, but it’s not anywhere like what you’ve seen on the solar side,” he said in a telephone interview today.

Price declines for products at every step in the solar supply chain triggered a 60 percent drop in the Bloomberg Global Leaders Solar Index since February tracking 37 shares. It’s led to speculation that more poly producers and panel makers may either combine or go bust in the coming months. Q-Cells SE (QCE), once the world’s biggest cell maker, has said it’s open to takeovers.

‘Shakeout Started’

“Two-thirds of the existing 66 polysilicon producers could fall victim to the shakeout that has just started,” the Macquarie analysts wrote in a note on Nov. 8. “The total number of Chinese polysilicon producers could fall to as little as four over the next three years, down from 35 known to us today.”

About 90 percent of China’s polysilicon plants comprising half the country’s production may suspend production because of the price slump, according to Xie Chen, an analyst at the China Nonferrous Metals Industrial Association, which acts as a conduit between industry and government.

Hemlock -- named for a Michigan town where it’s based and owned jointly by Dow Corning Corp. and the Japanese companies Shin-Etsu Handotai Co. and Mitsubishi Materials Corp. -- will raise its capacity 28 percent when a plant in Tennessee opens next year. It’s already increased 89 percent since 2008.

The company said today it’s delaying plans to add additional phases to the plant, citing a lack of demand.

Poly Makers

Wacker of Munich, OCI Co. of South Korea, GCL-Poly Energy Holdings Ltd. (3800) of China and Renewable Energy Corp. ASA of Norway round out the top five makers and together had capacity to make 131,000 tons of polysilicon last year, up from 50,000 tons in 2008, Bloomberg data shows.

“I haven’t seen any industry like this,” Woo-Hyun Lee, Seoul-based OCI’s chief operating officer, told a conference in Singapore on Nov. 2. “When the price drops so suddenly it hurts. Now there is very little room for fluctuation.”

OCI’s shares have lost about 40 percent this year through yesterday in Korea and Wacker has declined 46 percent in German trading. GCL-Poly has the highest debt compared with its equity, or 113 percent, of the top five that are publicly traded, Bloomberg data show.

Prices Plunge

Spot prices will fall into the $20s from about $33 today and are likely to stabilize at around $30 once a shake-out reduces oversupply after 2012, according to Sean McLoughlin, an industry analyst in London at HSBC Bank Plc, echoing a similar forecast by Macquarie. Leming of Ticonderoga says prices will reach $25 within three weeks and likely remain near that level for at least two years.

About 90 percent of supplies are sold under long-term contracts, many of which are under pressure to be renegotiated. Charges for contract cancellations can be more than 20 percent of their value, HSBC said.

Chemical companies such as Hemlock and Wacker make poly by baking raw silicon that’s derived from refined sand. It´s done in bell-shaped ovens containing silane gas, which then condenses over a period of days into rod-shaped chunks of 99.9999 percent pure polysilicon.

The rods are sliced into wafers using diamond-edged saws to make solar cells that are fastened onto panels to transform the sun’s rays into electricity.

Narrowing Margins

Wacker’s profit margin will shrink by 4 percentage points to 21 percent in the fourth quarter from the previous three months, according to a Bloomberg survey of five analysts who looked at earnings before interest, tax, depreciation and amortization compared to sales.

REC has developed a technique which works in a few hours and reduces the energy required by as much as 90 percent, making it the cheapest way of making solar-grade silicon, according to McLoughlin at HSBC. REC’s so-called fluidized bed reactor process grows beads of polysilicon from pressurized gas and tiny liquidized seeds of semi-purified material.

Polysilicon has been used as a semiconductor in computer microchips for decades. Supplies only became scarce from 2004, when European nations began introducing subsidies for clean energy. The price soared to $475 in March 2008 from about $30 in 2003. New capacity began to come on stream in 2008.

The famine turned to a glut when demand growth for panels slowed as solar-energy subsidies were cut. With plants taking at least two years to build, new factories are set to keep opening.

Expanding Capacity

Hemlock announced plans for its new factory in December 2008 when polysilicon was selling for $178 on the spot market. Wacker, the No. 2 producer, will double its capacity to about 60,000 tons by 2013, and LDK Solar Co. Ltd., the second-largest maker of wafers, will triple its poly capacity to 55,000 tons by the end of that year with a giant factory in Inner Mongolia.

The global supply of polysilicon is set to reach about 500,000 tons by 2014, Ewald Schindlbeck, head of Wacker’s polysilicon unit, said in an interview. That compares with 266,000 tons this year, according to Macquarie.

Even in an industry used to profit margins higher than 40 percent, the drop is hurting smaller producers. PV Crystalox Solar Plc last month cut production and fired workers at its poly ingot plant in Britain. It has costs of about $37 a kilo, according to McLoughlin.

Staudigl said that Wacker is negotiating individual agreements with clients and assessing issues such as their credit-worthiness. The company has contracts to sell almost all its planned production through 2015, spokesman Christof Bachmair said in a telephone interview.

While Wacker and the leading polysilicon producers may have fixed prices with clients for the next few years, that may offer them little protection should those prices push their clients into bankruptcy before they can make good on their commitments, said Gordon Johnson, an analyst at Axiom Capital Management Inc.

“Prices are going to go significantly lower,” he said in a Nov. 4 phone interview from his office in New York. “There will be certain people that go out of business.”

To contact the reporters on this story: Marc Roca in London at mroca6@bloomberg.net; Ben Sills in Madrid at bsills@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net