Investing In Silicon Suppliers

The Secret Side of Solar, Part One

Written by Brian Hicks
Posted April 8, 2008

It is often overlooked that the raw material supply sector of the solar industry can be just as profitable as the companies that make the end product.

I'm talking, of course, about polysilicon and the various stages it goes through before becoming a module, or the panels we see on roofs.

But before we get into investing in silicon... specifically in the ongoing silicon supply crunch and the many companies that produce it, let's first go over how silicon becomes a solar panel.

Here's how it works:

  1. oxygen is stripped from the silicon (usually found in sand) to form polysilicon
  2. polycrystalline silicon (polysilicon, poly-Si or poly) remains and is formed into single (mono) or polycrystalline (multi) ingots or ribbons
  3. ingots are formed and pressed into wafers
  4. wafers are deposited on substrates (usually glass) to become cells
  5. multiple cells are placed together on a panel to form a module

Of course, that is the extremely short version. And many companies have made their mark by altering or improving one or more steps in that process.

Other producers have found success by using entirely different feedstocks. The most successful, of course, has been First Solar Inc. (NASDAQ: FSLR) and their cadmium telluride solar energy technology.

But the solar industry is still (and will continue to be) dominated by silicon-based modules. And there is plenty of money to be made by playing the suppliers of silicon in addition to the makers of cells.

Who are the Silicon Suppliers?

Last week, Munich played host to one of the largest and most influential events in solar, Photon's Photovoltaic Technology Show.

Germany, as you may know, is mother of the modern solar industry and by far the world's largest market. So what happens there is taken into consideration by solar companies operating all over the globe.

Although not personally in attendance, the word on The Street is that silicon for solar supply continued to be a contentious issue at the conference, with industry insiders examining when, exactly, the prolonged crunch would be over.

The general consensus is that late 2009 (heading into 2010) will be when the supply crunch wanes. The reasons being the expanded production of a number of silicon manufacturers and the entry of new producers.

Here's what the big foreign producers have announced:

  • Hemlock Semiconductor Corp. growing production to 36,000 metric tons by 2011
  • Wacker Chemie (FRA: WCH) will reach 21,000 metric tons in 2010
  • Renewable Energy Corporation (OSL: REC) will reach 7,000 tons this year

It is important to note the previous projections of these companies (put out in the third-quarter of 2007) were much lower, indicating that new supply is coming online.

Yet the world's fourth largest producer of solar grade silicon, MEMC Electronic Materials (NYSE: WFR) has lowered its first-quarter revenue outlook, which Piper Jaffray analyst Jesse Pichel attributes to production issues and low output. Their revenue outlook was trimmed to $500 million from $560 million and their gross margin was trimmed two percentage points to 52%--still notably higher than the 30% most module manufacturers are striving for.

Rounding out the rest of the world's top current producers are Japan's Tokuyama, Mitsubishi and Sumitomo, which all trade on foreign exchanges. Tokuyama seems to be the best in breed of that group.

But some new players are entering the game.

Investing in Silicon Suppliers

If you missed the meteoric rise of the founding fathers of the silicon industry--MEMC is up over 550% in five years--there is still time to get in.

Obviously, supply and demand are dictating the opportunities in this industry. With demand currently outpacing supply, some new entrants were bound to enter the market. And not only that, some solar manufacturers are vertically integrating to bring silicon refining in-house.

The most exciting and clandestine opportunity in this space just might be Silicium Becanour, which was one of the first new companies to actually deliver silicon back in 2006.

The reason for the obscurity is the company was actually acquired in 2004, but continued to operate under its old name. The company that bought it was Timminco LTD. (TSX: TIM), and their share price has benefited handsomely from acquiring one of North America's largest producers of silicon. Take a look:

timminco silicon solar chart

Since coming online with 150 tons in 2006, Timminco (Silicium Becanour) quickly ramped up production to 1,050 tons in 2007and is projecting 3,600 tons by 2010.

I'm liking this one as the next MEMC. But wait until it comes off its highs a little bit before jumping in.

Next week we'll take a look at some of the new silicon suppliers that have entered and will be entering the market, as well as the solar companies that are bringing part of the silicon supply chaing in-house.

Until next time,

nick hodge


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