Cadmium Telluride Casts Shadow on First Solar

First Solar Inc. (FSLR) produces CdTe (Cadmium Telluride) based solar panels as their sole product. In a previous Seeking Alpha article I wrote that although Cadmium is extremely toxic, the mildly toxic tellurium is lethal to FSLR, due to a potential global tellurium shortage. It comes out that cadmium is indeed not just extremely toxic to human, but more fatal to FSLR as well, once I discover and understand what is RoHS and what it means to FSLR.

In simple words, the RoHS directive is a European Union environmental regulation that took effect on July 1, 2006. It deals with not any average hazardous material, but only the worst of the worst, the evil of the evils, only 6 hazardous materials made it into the top wanted list, cadmium is one of them. Needless to say, the restriction and enforcement is very tough, bringing any offending business to their knees. The full text of RoHS is only 5 pages and is pretty clear. The last page lists a very short list of products that are exempt from the restriction. FSLR's CdTe solar panel does NOT make it to that short list.

Read the wikipedia entry on RoHS. The restrictions are very tough. It separates a product into individual parts of homogeneous materials. Each part must not contain the banned substance exceeding a maximum concentration limit. The limit is 1000 ppm (parts per million) for other 5 materials but only 100 ppm for cadmium. For example, if a radio contains one little screw which contains more than 1000 ppm of lead, the whole radio is banned for sale in the EU. No matter that the lead in the screw inside the radio is unlikely leaked out during usage.

Clearly all products must fall into one of three categories:

1. It is in full RoHS compliance and hence not restricted.
2. It does not comply with RoHS, and hence must be put in a restricted product list.
3. It does not comply with RoHS, but an exemption is granted and is on the exemption list.

Since FSLR's solar panels are mainly sold in Europe, where does it stand on RoHS? Let's look at their Aug. 13, 2007 SEC filing 424B3, on the bottom of page 17, regarding the risks with the RoHS directive:

The use of cadmium in various products is also coming under increasingly stringent governmental regulation. Future regulation in this area could impact the manufacture and sale of cadmium-containing solar modules and could require us to make unforeseen environmental expenditures or limit our ability to sell and distribute our products. For example, the European Union Directive 2002/96/EC on Waste Electrical and Electronic Equipment, or the “WEEE Directive”, requires manufacturers of certain electrical and electronic equipment to be financially responsible for the collection, recycling, treatment and disposal of specified products sold in the European Union. In addition, European Union Directive 2002/95/EC on the Restriction of the Use of Hazardous Substances in electrical and electronic equipment, or the “RoHS Directive”, restricts the use of certain hazardous substances, including cadmium, in specified products. Other jurisdictions are considering adopting similar legislation. Currently, photovoltaic solar modules in general are not subject to the WEEE or RoHS Directives; however, these directives allow for future amendments subjecting additional products to their requirements and the scope, applicability and the products included in the WEEE and RoHS Directives are currently being considered and may change. If, in the future, our solar modules become subject to requirements such as these, we may be required to apply for an exemption. If we were unable to obtain an exemption, we would be required to redesign our solar modules in order to continue to offer them for sale within the European Union, which would be impractical. Failure to comply with these directives could result in the imposition of fines and penalties, the inability to sell our solar modules in the European Union, competitive disadvantages and loss of net sales, all of which could have a material adverse effect on our business, financial condition and results of operations.

In summary, the CdTe solar panel does not comply with RoHS, the homogeneous material of the portion of CdTe layer contains 470000 ppm (47%) of cadmium, far exceeding the 100 ppm limit. By virtue of simply mentioning RoHS, FSLR implied that it is not in RoHS compliance. By mentioning a possible future need to apply for an exemption, FSLR confirms that the product does NOT comply with RoHS.

FSLR made an incorrect statement that the product is not subject to RoHS directives. Any product sold within the territory of European Union, of course, is subject to any regulation that EU imposes on its territory. What FSLR meant to say is that the product currently is NOT explicitly listed in the restricted product list. It is certainly NOT in the exemption list either. Anything not RoHS compliant must be exempted and added to the exempt list, or be added to the restricted list. If it's on neither list, then it's an overlook and a loop hole to be plugged.

FSLR does acknowledge that EU periodically review their RoHS restricted product list and so in the future, they may discover that the CdTe solar panel needs to be put into the restricted list. If that happens, then FSLR must apply for an exemption. If they apply for an exemption, and fail to get one, then, the consequence will be devastating. The business is basically DOOMed in that case, because they have no other viable product.

FSLR is in a very dangerous situation. They are basically playing with fire. They understand their product is non-RoHS compliant and acknowledged that fact by implying future need to apply for an exemption. None-compliant products should be explicitly put into the restricted product list, unless an exemption has been granted and it is listed in the exemption list.

I call on First Solar management to come out and clarify the RoHS compliance situation publicly. I think this is clearly a loophole. The product is in neither the list of restricted products nor the list of exempt products. I urge them to contact the EU authority to get a clarification of the status of their product; is it RoHS compliant, or is it non-compliant? Should it be put into the restricted product list and was overlooked? Does it qualify for an exemption or not? Should they apply for an exemption now? First Solar, please surrender yourself to the EU authority, let them make a determination. If you don't go forward yourself and obtain a clarification letter, when the EU authority comes forward to you instead, it could be much more devastating to the company's business. So please don't take a chance and don't take advantage of a possible loop hole. You have a wonderful management and engineering team. But please execute your business in an open and honest way free of legal hurdles.

More over I call on the CEO to consider diversifying First Solar's business from the sole CdTe solar panels. This is a deadly combination, an extremely toxic cadmium metal nobody is willing to touch, and an extremely rare tellurium element on earth, supply of which is so limited that it could suffocate FSLR's future growth. I have been trying to buy a few hundred pounds of tellurium as a speculative small time investor, I could not find any ready to deliver inventory any where in the world, and have to wait several months for delivery, despite of the small quantity I tried to order. You have been searching around the world to buy tellurium supply to babysit and spoon feed your own CdTe suppliers, so you must know how touch it is to get the supply, more so when your Malaysia factories open next year. This academic paper says that you really don't have terawatts level of tellurium availability despite what the CFO said.

For further readings on RoHS, read this.

Full disclosures: I am short in FSLR and plan to add to short positions when it starts to collapse. I am also trying to buy tellurium metal ingots as an investment.

Comments

[Mark Anthony]

Kudos to Seeking Alpha for publishing this article. As always, I take full responsibility for its content and publication does not necessarily mean Seeking Alpha endorse my view point. There are only two pieces of critical evidences here, FSLR's SEC filing that I quoted as is, and RoHS directive. So it's unlikely I misunderstood anything.

The fact of the matter is based on FSLR's SEC filing and my understanding of RoHS, the CdTe really should be added to the RoHS restricted product list, or an exemption must be obtained. Currently it is neither on the restricted list, nor on the exempt list. This is clearly an over looked loop hole on the Euroean Union's part. Because of this loop hole, FSLR's product can be sold in EU, legally. But if they discover the loop hole and plug it up, FSLR will be devastated!

Let me make it absolutely clear: I do NOT blame FSLR management of ANY wrong doing. Everything they have done in selling their product in Europe, is perfectly legal. They took advantage of a loophole. But it is perfectly LEGAL to utilize loop holes, until the hole is plugged, then it is no longer legal any more. I think managements that can take advantage of loop holes are smart, but don't bet your future on it!

I accuse the management on NEITHER the fact that cadmium is extremely toxic, NOR the fact that tellurium is extremely rare. Both facts are the making of the nature, not your responsibility. But you could be liable to the shareholders if you have been warned this could be a path to a death march, and you realize that and you march on nevertheless just because you worry about your stock options. So at least please start to consider diversification so the company may survive in the future.

My advice to FSLR management is you need to come clean on this issue, get a clarification letter from Europe! It's better that you come forward on your own than that you let them catch you!

[Mark Anthony]

Further readings on RoHS in plain English:
environmentalchemistry...
If a company as harmless as APPLE had difficulty compliying with RoHS and had to recall some products, what about the highly toxic CdTe of First Solar?

[vboring]

Sounds like more unjustifiable alarmism, Mark.

If every company is having trouble complying with the new RoHS standard, the standard will be changed.

The other option will be to let the economy die.

And even if Europe did close its borders to all FSLR product, California and Texas will be more than happy to soak up the supply.

I'm afraid the crash you are shorting for has no foreseeable cause today.

[techy]

shaun:

so you are saying that we should not care for mark's analysis/research and should continue holding shares of FSLR, even though there is a risk that it may go to zero??

[Mark Anthony]

Shaun:
It's not alarmist, it's the regulations. RoHS must be complied, period. It is indeed tough to follow the RoHS. It must necessarily be so, only 6 of the most deadly substance is included in RoHS so it is reasonable to expect that compliance is unconditional, because the environmental consequence is too devastaing.
I don't think the regulation will be changed, it will only get tougher in the future, companies must comply. If compliance meant death to certain corporation, then so be it. We would rather let the companies die and the planet lives, than to see the planet dies and the companies prosper. The earth is our only home.
Ironically FSLR calls itself green technology. But there is nothing green when you can not even comply with RoHS requirement.

[GH]

Mark, why do you creatively mis-interpret simple English statements to favor your own viewpoint? Recently you called First Solar's CFO a liar and then made it clear you seized one clause out of context. Now you have done the same thing again. Here is what FSLR said:

"Currently, photovoltaic solar modules in general are not subject to the WEEE or RoHS Directives".

You say this means "In summary, the CdTe solar panel does not comply with RoHS".

RoHS DOES NOT ADDRESS SOLAR PANELS! You might as well say that SunPower's solar panels do not comply with RoHS - or anyone else's, that contains no Cd.

Your "logic" then deduces that First Solar is a goner, despite any number of potential outcomes. You don't even mention that First Solar always includes in its contracts an agreement to take back and recycle all its panels at the end of their useful lifetime, thereby guaranteeing that the Cd will not end up in a landfill. Surely the Eu will consider this guarantee when determining whether to grant First Solar's panels an exemption... don't you think you should warn your readers of this potential outcome, before they short FSLR? You make many demands of First Solar regarding honesty; perhaps you should first hold yourself to such a standard.

[Mark Anthony]

GH:
Why must you distort my logic in order to make an argument? I did conclude that the FSLR product is NOT in compliance with RoHS, and in the same paragraph I clearly listed the reasons: 1.Cadmium content far exceeds the RoHS limit. 2.FSLR itself achknowledged the possibility of needing to apply for an exemption in the future. If the product is already in full compliance to RoHS, you would never need to apply for an exemption.

They incorrectly stated that general PV products are not subject to RoHS. All products are subject the regulation. PV product was never listed as an exemption so of course it should be covered. They just overlooked it and did not include CdTe PV into the restricted product list. It's a loop hole. FSLR itself acknowledged that the loop hole may be plugged in the future.

If some one report this to EU, the loop hole could be plugged much sooner. I think I am going to do it and get a clarification from Europe, see what they will say?

[calisdad]

every time you post the sky is falling on FSLR I crack up. if that short play bothers you so much get out of it. you are losing too much sleep.

[TexasRadio]

This is an interesting point. I have noticed the RoHS stickers on all of the Taiwanese mainboards used in my workplace. Why should Taiwanese semiconductors be required to meet RoHS but not Arizona semiconductors? Particularly when you consider that alternative products - which do not use restricted toxins - are both available and more than an effective substitute. The enviromental issues associated with the use of the CdTe panel could perhaps best be parodied in a re-work of a famous quote: "In order to save the environment, we had to destroy it." First Solar might adopt that as a company slogan.

[TLD2]

Your acting like a "Bear" when you should be running with this "Bull". FSLR is an outstanding company with an outstanding product. I bought on the first day at $24.84 because I know FSLR. The mfg. plant in just down the street from me. (Toledo, Ohio) I think you should do some more research objectively. As a matter of fact, here's a good place to start: firstsolar.com/pdf/Bro... FSLR is utilizing a hazardous by-product and turning it into something very useful. I'm not going to waste my time any further...if you want to short FSLR, GO FOR IT!! I love a good rally in the form of "covering shorts". Trying to profit from getting anyone to believe your position really stinks. Anyone reads the link enclosed above, will see right through your plan. I get a chuckle out of posts about FSLR and I agree with Calisdad.

[BamboozledAgain]

I do not have, nor have I ever had, a position, either long or short, in FSLR. Most of my investment experience has been in going long; I rarely short.

Disclosure out of the way, it is always so disappointing and so predictable how, when faced with facts contrary to his agenda, the typical ignoramus will always "attack the messenger" instead of addressing the "message" or argument.

Have those of you who indulge in this behavior here taken even the minimal initiative to follow the author's referenced links and read the contents, much less do an even more extensive research into the industry? If so, given that I have seen not a single one either in these comments or in those corresponding to the earlier "article," why can't you provide rational counterarguments against the author's position? Why must you take his points "personally,"... and attack everything about him BUT his arguments?

Yes, the author has a vested interest in seeing FSLR fail. But, when weighed objectively, the points that he makes are valid, whether or not he had any position in the FSLR.

I would think that, if I were a truly long-term long in FSLR, AND if I were a reasonable person, the issues raised by the author would raise some important questions for which I would seriously want some answers.

Regarding the issue of the potential shortage of Te, I would think that a reasonable long would DEMAND clarification from FSLR on the illogically wide discrepancy between its claims of the amount of Te supply available and that widely acknowledged by the rest of the world to exist. FSLR may be right - it may have discovered some previously unknown corner of the world where colossal mountain ranges composed entirely of Te exist - but, if so, provide at least some sort of ameliorating substantiation. Without such answers, how can you feel comfortable with such a wide gulf of irreconciliation between the two positions?

Concerning Cd, the fact is that, per EU, Cd is the most offensive of the 6 designated unacceptably toxic materials. Fact is that anything containing any of these 6 materials in greater concentration than specifically mandated AND not specifically exempted from being prohibited IS prohibited. As the author has noted, if a thing that is marketed in the EU that happens to meet the two aforementioned criteria has not yet been prohibited from continuing to be marketed, it is merely so due to either lack of awareness or enforcement by the governing bodies.

Here, as well, FSLR may turn out to be "right," in that, at some future time, FSLR may, through whichever means, "win" an exemption, or the EU may change its regulations concerning toxic materials. Nevertheless, as of now, and notwithstanding the author's short position on the stock, FSLR is in contravention of current EU regulations.

Likewise, concerning Te, absent heretofore unknown discovery, there is nowhere near enough Te in the world, either cultivated to-date or estimated to be cultivatable henceforth, that would come remotely close to the supply claims recently made by FSLR.

So, aside from, again, "attacking the messenger," how do you refute these two major points of concern for the potential viability of FSLR as a going-concern?

[Mark Anthony]

TLD2: You complained in another thread that I did not respond to you here. That's because it's a waste of time. You cited a NREL paper that's not even irrelevant. The paper discussed cadmium environmental impact during the whole production cycle. The paper contains NOT a single number regarding global tellurium production. The paper also contains NOT a single mentioning of RoHS, the European environmental regulation that could kill FSLR. We are talking about RoHS here so please cite a paper that at least deal with RoHS.

As far as RoHS is concerned, the language is clear. Any portion of your product containing more than 100 ppm of cadmium, you have exceeded the RoHS restriction. Doesn't matter you have done tons of experiment showing there is no leakage. An exemption can only be granted when otherwise there would be serious environmental and health issues, and reasonable alternative or replacement is impossible.

Let me give you one example: The same CdTe layer can be used as light powered battery cell for a small calculator. It only needs a tiny piece a fraction of a finger nail CdTe solar cell to power a calculator. But since calculators are included in the restricted product list, such a calculator is BANNED for sale in Europe just because that tiny little piece of CdTe cell.

Now how much bigger is a FSLR solar panel in comparison? It was a simple overlook that they did not include solar panels into the restricted product list, that's why I say it's a loop hole. It makes no sense that a calculator containing a fingernail size CdTe cell is banned, but 2 feet x 4 feet CdTe solar panels are not banned!!!

Once Europe realize that overloop and plug the hole, it will be devastating to FSLR, because currently virtually ALL of its products are sold in Europe. Before Europe even take actions to correct the problem, potential customers could realize the future problem itself, and refuse to buy the CdTe solar panel. To them it is a 20 to 30 year investment and they need to make sure it complies with oHS for the lifetime of installation!!! Who would want such a headache in the future?

[redqid]

Hey Mark. Interesting post. I just found out on another site about the cadmium in FSLR products.

I think the company is disingenuous to talk about recycling this toxic mining waste. You could say the same thing about lead from zinc mines being used in auto batteries. That would make Exide a major green company. Just a stupid statement.

I would be curious how much they are setting aside per panel to recycle these panels 20-30 years into the future. My guess is that it is a tiny amount and they are counting on the insurance company to grow the fund over the years. My guess is they will be out of business before then.

With a PE of 122 for 2008 earnings, it is just a short squeeze at the moment. When VMW hit $125, the longs were congratulating themselves and of course VMW was going to $200. This one will fall also.

[JSY]

I had been reading messages about FSLR in this side, and searching information on the web for 2 full days.

My conclusion for FSLR is LONG.

[FSLRAnalysts]

It looks as if First Solar is also concerned about the supply. They are vertically integratrating when demand for their products is well above their ability to supply. The Acquisition of DT was a bit odd for them. They are above 20% OM, which gives them cash to do two things - lower the solar price further or expand the business. Instead of preparing for further GW capacity increases, they are moving verticle. To me, this signals a hint of risk. They are moving into the US market with the acquisition but they are also moving away from PV manufacturing as the sole source of revenue. It looks like Te supply is a concern for FSLR afterall.

[telluriumreseachprice]

Thermal Electronics Corp .is a manufacturer of Thermoelectric appliances, and we use tens of thousands of modules a year. So, when I read Mark’s article on First Solar I was concerned as it directly affected my lively hood and that of my employee’s. We are also spending 100’s of thousand’s on research designing and alloying material to build a more efficient module. Two years ago we started purchasing small quantities of tellurium for our research. We though nothing of the cost about $70 USD / kg. Last year the price jumped to 115/kg. So things started to happen and I wanted to find out why cost of Tellurium was starting to increase. Hence Mark’s article. In December we needed to purchase about
20 Kg of material. At that time our price jumped to 260 USD/Kg. I for one needed to see if this was a trend or just speculation. Today I emailed my contact and found out that they now want $360/kg. 5Nplus, by the way is now public as of December. Their stock IPO’d at around $6 and is now $11.50. They sell Te
at 264/kg, but cannot supply it as all of their production is spoken for till May/08.
I belong to Asiametal.com and read article’s today that there has been so many inquires for Tellurium that Traders are buying up supply and hording it. They figure that within the year tellurium will be so short of supply because of speculation the price will be in the 1200-1500 USD/kg range. I for one just purchased about 2 years of supply of modules and material. I figure I’ll hedge
to protect my business and buy it now when it’s cheaper.

[Mark Anthony]

Some update on the relationship between Europe's RoHS regulation, and CdTe solar PV modules. Here is a nice article to read:

www.obg.com/documents/...

[smaddox]

The fact of the matter is that Cadmium is a byproduct of zinc mining. If it wasn't used for solar cells and batteries it would be put right back into the ground (or worse).

Actually, Cadmium salts (of which CdTe is included) are quite stable, and therefor fairly inert. Honestly, the toxicity is overblown. NiCd batteries have been used for over a century in peoples homes without any adverse side effects.

[David N MO]

First, I just read that the EU has no restrictions of NiCad batteries.
Second, the coal pile next to my 6th grade classroom contained enough mercury for us to collect puddles in our palms to play with during class. I think it's great to sequester mine waste ( if no one wants it, it is waste) into a product, along with a very valuable element, for 25+ years. the Tellurium almost guarantees it will be recycled.