Report: Winners And Losers From Collapsing Polysilicon Prices

Eric Savitz at Barron’s has a research report from Collins Stewart solar analyst Dan Ries which spells out some good and bad news for the solar industry.

First the bad news:

Ries contends that spot prices by mid-2009 will plunge to the $40-$60/kg level [from a peak of about $450/kg in mid-2008], 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%.

…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.

And now the good news:

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. With poly in the $40-$60/kg range, he says, module prices would drop to the $1.70-$2/watt range, and utility scale projects could produce power for 11 cents/watt. At that rate, he says, solar would be “reasonably competitive” with combined cycle natural gas facilities and wind turbines. “A significant market would open and drive a wave of growth for the industry,” he says. “In the long-term, a collapse in polysilicon would be extremely positive for the industry,” but only after a “difficult adjustment period with falling prices and negative growth.”

…Ries has a Sell rating on Suntech, Hold ratings on Canadian Solar (CSIQ), JA Solar (JASO) and Solarfun (SOLF), and a Buy rating on First Solar (FSLR) and Yingli Green Energy (YGE). He also notes that a huge drop in pricing could be a boon for solar installers, including Europe’s Phoenix Solar (PS4.DE.)

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