All forms of alternative energy are set to become big business, but it’s not a one-way gravy train. I have explained my caution over the biofuels market – I just don’t think it adds up, but there could also be problems in store for the solar panel industry in the next few years as well.
Demand is certainly expected to accelerate – significantly – but there may be trouble keeping up with demand because of the lack of supply of one of the major substrates involved. That substrate is polysilicon.
Polysilicon has been used for years to make microchips (hence the term silicon chip) but it is also used in the manufacture of photovoltaic cells. Competition for supplies between the two industries has resulted in a supply crunch, with it being a couple of years before significant new production comes on stream.
Indeed, so tight is the supply, some solar panel companies have even been negotiating equity swaps with suppliers in order to secure supply of this vital substance.
Semiconductor manufacturers have been getting very concerned about the amount of their vital substrate being used by the solar industry; rightly so. The spot price has been soaring and chip makers are starting to secure longer-term contracts with suppliers.
This is a major headache for manufacturers. You must consider this factor before you invest in any solar-panel play. They are going to have to pay a lot of money for their vital substrate – if they can get hold of any at all. This is a real risk and it makes me cautious on the profitability of solar-panel makers for the next couple of years. Those margins are likely to be tight.
Polysilicon stocks to watch
The biggest supplier of polysilicon in the world is a company called Hemlock Semiconductor. The company is 63.25% owned by Dow Corning Corporation, a 50-50 joint venture between Dow Chemicals (US: DOW) and Corning (US: GLW). A further 24.5% is owned by Shin-Etsu Handotai, a wholly-owned subsidiary of Japan’s Shin-Etsu Chemical, which is listed on the Tokyo Stock Exchange (4063.T). The remaining 12.25% stake is owned by Mitsubishi Materials, which has its main listing in Japan (5711.T) but it also has a secondary listing in Germany (5711.DE).
At the start of May, Hemlock said it would invest up to $1bn over the course of the next four years to expand its main facility in Michigan. This will result in a significant increase in capacity by 2010; a whopping 90%. This will bring the company’s annual output of polycrystalline silicon to around 36,000 metric tons.
“The solar energy industry is growing at a tremendous pace,” said Marie N Eckstein, Dow Corning’s vice president. “A readily available supply of polycrystalline silicon is essential to continued innovation in this promising alternative-energy industry.”
On Thursday, German group Wacker Chemie (WDN.DE), the world’s second-largest polysilicon producer, became the latest materials group to unveil its expansion plans. The company said that it would start the latest stage of polysilicon production expansion at its Burghausen site by an additional 7,000 metric tons to a total of 21,500 metric tons per year. The first polysilicon from the new site is expected to be available in the fourth quarter of 2009.
This news prompted Merrill Lynch to raise its price estimate on Wacker shares to 195 euro from 180 euro, but this is not much more than the current share price. The broker said that the expansion plan was “a further positive signal regarding the long-term demand prospects for the polysilicon industry.
So, as the input costs for polysilicon increase, margins at solar manufacturers will shrink significantly. The price look set to continue to rise so, until these new production facilities come on stream in the next few years, I believe it will be the manufacturers of polysilicon that are making hay, rather than the solar panel manufacturers themselves.
However, once these new manufacturing sites come on stream, solar industry profits look set to soar.
By Garry White for his ‘Garry Writes’ newsletter. To find out more about his monthly newsletter, Outstanding Investments, which expands on his views and makes specific recommendations in the resource, infrastructure and biotech sectors, click here: Outstanding Investments
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