BusinessWeek: Clouds Over the Solar Industry

By: TraderMark Sunday, December 21, 2008 4:14 AM

Symbols: MDS, NCI, SOLF, STP

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And according to market researcher iSuppli, overall polysilicon capacity is set to reach 430,000 metric tons by 2011, up from just 53,500 metric tons at the end of 2007. (we called for this overproduction but assumed growth would still be going strong into 2009 to match supply - but anything China can overbuild; they will - polysilicon plants generally takes 2 years to get up and running at full capacity; the avalanche shall commence soon) Plunging prices and profit margins have put enormous pressure on new suppliers such as China's GCL Silicon Technology. GCL expects to have 24,000 metric tons of annual polysilicon capacity by the end of 2010 compared to a 3,000-metric-ton capacity in 2008. That would make GCL one of the world's largest producers.

Yet as global demand for PV panels has slackened, GCL Chief Executive Officer Hunter Jiang says his predominantly Chinese clients want to renegotiate their long-term polysilicon contracts to mirror the declines in the spot market. In particular, China's SunTech (STP) is trying to rework its contracts with suppliers to help offset the slump in demand next year.

The tough environment also extends to companies further down the supply chain, such as makers of solar modules and wafers—the halfway point between raw polysilicon and finished PV panels. According to analyst Henning Wicht of iSuppli, these players are facing increased competition as profit-starved polysilicon suppliers try to move into the higher value-added module and wafer business.

One trying to ride out the storm is SolarFun (SOLF) in Qidong, Jianjsu Province. When times were good, the company had expected to produce 175 megawatts to 190 megawatts of PV cells and modules this year. It also planned to add four cell production lines in 2009 after inking a new three-year supply contract with Germany's Q-Cells. But on Dec. 2, SolarFun reduced its 2008 production target to around or below 175 MW. The expansion plans? Shelved for now.

The problems aren't limited to new entrants. Q-Cells cut its forecast for yearend sales on Dec. 9 because of weakening market demand linked to the current financial crisis. According to the company, roughly 40 to 50 of its 80, predominantly Chinese, customers have postponed orders

The jump in financing costs also is hitting the last step of the solar supply chain: End consumers who now can't afford to expand capacity.

...it increasingly pays to be big. Q-Cells, SunTech, and other heavy hitters may be cutting back, but they still have the financial muscle to survive, while many independent firms could go under. Analysts reckon the industry is set for a round of bloodletting in the next 18 months

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