Suntech Power (NYSE:STP) would have another reason to celebrate if the Chinese government indeed goes through with its plan to ease control over the country’s booming polysilicon industry.  This comes in the wake of the enormous opportunity that opens up for Suntech after it landed the $81 million contract to supply portable solar power systems to the UN. You can read more about this in our article Suntech’s Gain Goes Well Beyond Revenue from New Contract. Suntech is the world’s largest manufacturer of crystalline silicon photovoltaic (PV) modules and is China’s largest U.S. listed solar player by market capitalization. It competes with other solar-industry giants including FirstSolar (NASDAQ:FSLR), SunPower (NYSE:SPWRA), and Yingli Green Energy Holding Com (NYSE:YGE).
Our price estimate for Suntech Power stands at $10.68, roughly 15% ahead of market price.
China and the Polysilicon Industry
Polycrystalline silicon, or polysilicon as it is more commonly known, is the principle component used in the manufacturing of photovoltaic (PV) cells. The increased focus on solar energy by many countries has led to a direct increase in the demand for polysilicon in the recent past. The global demand for polysilicon was about 42,000 metric tons in 2008, and is expected to increase to about 100,000 metric tons by 2014. .
A shortage of polysilicon in 2007-2008 resulted in new entrants in the market as well as an increase in production capacity from the existing major manufacturers. The number of polysilicon manufacturers has increased from 7 in 2008 to 70 in 2010.  This quickly changed the market situation from a shortage to an over-supply of polysilicon – due to which the Chinese government imposed significant curbs on polysilicon players. 
But with Chinese demand for polysilicon growing exponentially, the country has had to import significantly higher quantities of polysilicon this year.  This is what likely prompted the Chinese government to take a step in the direction of relaxing the norms for the industry.
What This Means for Suntech Power
Polysilicon prices represent the single biggest cost associated with the manufacturing of PV modules for Suntech. Polysilicon prices reached $114 per kg earlier this year – almost double the figure at the end of last year.
The sensitivity of Suntech’s stock to the production cost per watt is best illustrated by dragging the trend line in the interactive chart above. With the company striving to reduce its production costs through efficiency improvement and a focus on research, the relief from reducing polysilicon prices would provide a much needed breather.
- China May Ease Control over New Polysilicon Projects, Business China, April 12 2011
- Polysilicon production, Goliath Business News, April 1 2011
- Global Polysilicon Market Report 2010, Koncept Analytics
- China Tightens Rules for Solar Polysilicon Plants, Bloomberg, Jan 25 2011
- Polysilicon in China in tight supply, ElectroIQ, 22 March 2011
Disclosure: No positions