How The Polysilicon Shortage Affects Solar Energy Stocks

How long will the polysilicon shortage last? This question has been on my mind for a while now and so far I still haven’t found a clear answer. I have read forecasts that say the shortage will last until 2008 but then I have also read that shortage will last well until 2010 and beyond.

If you are invested in solar energy or are thinking about it then it’s important to get a clear picture of the polysilicon supply in the coming years. Right now the only thing stopping solar cell/panel manufacturers to increase production is the shortage of polysilicon.

What is Polysilicon?

Polycrystalline silicon or polysilicon or poly-Si or simply poly (in context) is a material consisting of multiple small silicon crystals (wikipedia). Polysilicon is a key component of solar cells and the recent shortage has caused the prices to soar.

There are two scenarios here:

If the polysilicon shortage continues to last beyond next year and continues for a few year then it benefits:

* MEMC Electronics (NYSE: WFR) - Polysilicon supplier
* First Solar Inc. (Nasdaq: FSLR) - Thin film solar cell manufacturer
* Evergreen Solar (Nasdaq: ESLR) - Uses string ribbon technology that uses less polysilicon.
* Daystar Technologies (Nasdaq: DSTI) - Thin film solar cell manufacturer

If we see more supply and prices stabilizing or declining starting next year then it benefits:

* Suntech Power (NYSE: STP)
* Sunpower Corp. (Nasdaq: SPWR)
* Trina Solar (NYSE: TSL)
* Canadian Solar (Nasdaq: CSIQ)
* Solarfun (Nasdaq: SOLF)

Let’s look at what the solar cell makers have to say:

Suntech Power:

We do believe in the next year or two there will be about five or more polysilicon manufacturers in China, and as I always say manufacturing polysilicon is not a rocket science. There could be some teething problems in the beginning, but we do believe polysilicon will be manufactured in China very soon in large quantities. (CEO Zhengrong Shi from SeekingAlpha conference call transcript)

Sunpower:

* We expect polysilicon prices increase further in 2007.
* We expect that polysilicon demand will continue to outstrip supply throughout 2007 and potentially for a longer period.

Other Sources:

* According research firm The Information Network, the amount of polysilicon shortfall is likely to triple to 71,000 metric tones (MT) during 2006 to 2010. (Digitimes)
* Polysilicon supply will remain tight until 2008, according to research by JP Morgan in a September 2006 research report. The equity firm attributed the cautious expansion to the vast investment involved and the experience of vicious oversupply in 1998. JP Morgan further noted that most polysilicon vendors require stringent long term contracts with favorable pricing agreements before they start building new capacity under the mentioned considerations. (Digitimes)
* Hemlock Semiconductor, the largest polysilicon maker, is spending nearly $500 million to double its output from 7,700 to 14,500 metric tons annually by 2008. Germany’s Wacker-Chemie is boosting production from 5,500 to 9,000 tons. MEMC Electronic Materials, which makes polysilicon and silicon wafers, plans to double production from 4,000 to 8,000 tons. [EDN]
* Several leading solar energy companies projected that the global shortage in silicon, will ease by 2008 as production capacity expands. The forecast was made by Elkem Solar, a leading polysilicon supplier, and BP, one of the largest producers of photovoltaic [PV] cells, at the second annual “China’s Power and Alternative Energy Summit 2006” on June 8 and 9, 2006. (WorldWatch)

I still don’t know if the shortage will end next year or continue until 2010 and beyond. Right now I am betting that we start seeing some relief in supplies starting next year. Chinese polysilicon suppliers should help with the supply constraints as well and my guess is that we will see Suntech Power, the largest of the Chinese solar cell manufacturers, to vertically integrate by adding polysilicon production.

Right now my holdings reflect that I believe polysilicon shortage will ease in 2008.

Disclosure: I own call options on STP and SPWR and put options on WFR and FSLR.

Comments

[[e-mail]]

You have not discussed Energy Conversion that has expanded their solar business and Does not rely on polysilicon.

[Nick H]

If 25% of human energy needs are to be met by PV by year 2030, we need to be producing 16 million metric tonnes per year of polysilicon.

Working out below:
Human Energy Consumption

2005 Fossil Fuel consumption rate 1.23E+013 watts
Global demand growth rate 2.00% compound
Total global energy use rate 2005 1.50E+013 watts
Projected energy use rate 2030 2.46E+013 watts
Projected annual energy consumption 2.16E+017 Watt-hours P.A

Energy output from 1 watt solar cell 1.20E+003 Watt-hours P.A
Installed PV capacity required to meet 25% of our needs by 2030 4.49E+013 Watts peak

Polysilicon required to make PV 8 grams/watt peak

Total polysilicon required to be in use if PV will meet 25% of 2030 requirements 3.59E+014 grams

Annual polysilicon production required to meet 25% of our needs by 2030 1.63E+013 grams per year

Or 16331486.94 Metric tonnes per year

Therefore current and planned capacity is less than 1/100th of what will be needed if we were to be on track to fulfill 25% of our energy needs with PV by year 2030.