Solar: What Happens When Polysilicon Prices Collapse?

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.

Barron’s