JA Solar Hit by Wafer Market Whipsaws

| About: JA Solar (JASO)

While not all solar systems are made with polysilicon, they remain the material of choice for most rigid solar panel makers. Thus changes in the market – both short- and long-term – can dramatically impact the profits of Chinese solar stocks.

It was with that in mind that JA Solar (NASDAQ:JASO) today announced it would buy the rest of Silver Age Holdings. While this looks like a story out of the British Virgin Islands, it's actually an inside job. Silver Age owns Solar Silicon Valley, a China-based maker of polysilicon wafers. Silver Age is also 70% owned by a firm controlled by JA Solar chairman Baofeng Jin. What he's doing is taking a speculative risk on wafer prices inside the main company.

The reason for this is short-term. Wafer companies like Korea's OCI are resisting customer calls to drop prices in the face of rising supplies. Investment in wafer production often lags demand, leading to big wafer profits when the downstream market starts to grow.

New demand based on fears arising from the Fukushima meltdown mean boom times, so shoring up supplies looks prudent. Solar Silicon Valley can produce 485 Mwatts of wafers a year, according to industry publication PVTech, and it has a plant worthy of further investment.

Spot prices for wafers, on the other hand, are on the decline, alongside prices of finished goods. Long-term contracts are being canceled at great expense in order to grab bargains on the spot market.

Prices should decline further starting in 2013 as U.S.-based 1366 Technologies brings its $150 million wafer plant online with a government loan guarantee. Instead of cutting solid silicon bars with saws, 1366 wants to form wafers from molten ingots, cutting wafer production costs in half with production to 1 Gwatt of power expected in 2014.

This kind of disruptive technology is both the boon of the industry and the bane of producers like JA Solar. Falling costs mean rising production, but the likelihood of disruptive technology entering the market also makes any kind of long-term plan, even JA's purchase of Solar Silicon, a risk.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.