Solar Silicon Conference: LDK Investor Group Reports

Hakan Telenius co-wrote this article.

The Solar Silicon conference in Munich dealt with the supply and demand of solar silicon – a key issue for the near-term development of this industry. It also provided an update on the field of "Upgraded Metallurgical" silicon. The conference was a follow-up from a similar one held last January in China. This one was heavier on western/European companies; while the January meeting had a greater emphasis on the new Asian entrants.

We hope you will find the information useful as a background to the area in which LDK Solar (LDK) is operating. The notes below are a summary of our impression of what was said, and is neither exhaustive nor comprehensive. For those interested, we do have a lot more information available in the form of slides, which may be posted on the private facebook group site if there is demand. You can find the conference agenda here.

Overview

Michael Rogol provided the keynote opener at the conference. His group [Photon Consulting] is one of the firms tracking the rapidly growing field of companies operating in the area of silicon production. They look at costs, production levels, and make forecasts: many companies (including LDK) and some investors rank among the group’s clients. Rogol’s key points:

• Very bullish on near term [next 3 years] prospects for Si producers

• “Remarkably strong fundamentals for next several years”:
  • Volume growth
    • There are now 175 companies with a combined 400 kT production target by 2010; expanding to 700 kT by 2012.
    • Rogol’s more conservative estimate is that half, or 200 kT will be produced in 2010 (this equates to 24GW c-SI + 2 GW thinfilm).
  • Strong pricing remains [even through 2010-12]; the prediction is for spot to go from $350-$400/kg to $500/kg in 2012. Spot at $485/kg recently.
    • The KEY basis for this forecast is that they forecast a “very large demand for modules at $2-2.50/W; a price that mfrs can meet today without subsidies” [Photon’s demand curve stretches from 2GW to 15 GW/yr at this price].
    • Rogol sees the downside risks primarily in
      • higher interest rates [this is the most important factor];
      • lack of new government subsidies to drive installations; and
      • “even greater volumes”, ie, more poly Si available than forecast
  • Fast profit growth
    • Current reported cost to produce a kg of polySI for 21 companies is $28-$78; or $36/kg in weighted average. It is unclear who will be the costleader in 2010.
    • Photon forecasts producers operating margin going from 50% in 2007 to 60% in 2011-12
    • ..”though numerous downside risks exist” [for poly producers’ continued profits]. Risks include:
  • New entrants (175 companies being tracked]
  • Production cost escalation of $1-5/kg is expected, though this amount is insignificant due to contract terms and continued strong demand.
  • Upgraded Metallurgical Grade-Si players are entering the field with good data. Photon is tracking such 26 companies
    • Eg CSUN guiding 150 MW such production for 2009
    • Rogol: “will UMG be cost competititve with PCS modules? Plausible, but not on mass scale until after 2010”
  • Thin film: - Photon tracking 135 companies with equipment ordered for > 7 GW by 2010
    • FSLR is the only large player in the film. Rogol said that thin film will advance and may become a plausible contender to traditional polySi technology - but not on large scale until after 2010

Industry Leading Poly Producers

Following the opening speech, several of the largest poly producers provided their perspectives.

Hemlock:

• Compared to Photon, Hemlock is bearish on outlook for sector – though they are expanding nonetheless:
  • Their capacity is increasing by >28 kT from 2005 through 2011
  • Capacity will be 19 kT at end of 08; 36 kT before 2012 [further expansions being explored]
• Most remarkable prediction: “there should be adequate supply of silicon for 80% growth in the solar industry in 2008”

REC Silicon:

• Also rapidly increasing production:
  • Increasing to 20 kT Poly production in 2010 [new Fluid Based Reactor plant ramping up to 10 kT over two years].
• Believe that 125-160 kT global prod in 2012 is realistic
• Pricing pressure from coming oversupply will initially hit downstream [panel manufacturers etc]
• Despite growth in Poly production, there is no immediate oversupply, because
  • Prepaid take or pay contracts for Si producers
  • Non existent poly inventories need to be replenished
  • Underutilized downstream capacity
• Future cost / margin pressure will favour Upgraded Metallurgical Grade [UMG] Si technology [inexpensive], and FBR technology [relatively inexpensive; this is where REC is expanding]
• Customers want increasing purity of poly [to enhance conversion efficiency]: this will favour Siemens technology and FBR technology, rather than UMG.

Most Recent New Entrants

There were also invited speakers from the two most recent entrants into polyproduction, though not much information was actually given.

DCC Chemical:

• Construction of DCC’s first phase went from 2Q-06 – 4Q/07: 18 months. Traditional Siemens process and designed for 11 nine purity.
• The capacity of this first phase is 5 kT/yr and they invested $400 million
• DCC has just shipped its first production – it took them 3 months to get the plant going; achieving >9 nine purity according to SPWR and others.
• On rampup, they said that “we will not produce 5 kT this year” but otherwise no info on expected time or costs.
• DCC is currently underway constructing Phase II; giving a further capacity of 10 kT/yr. They are predicting a slightly shorter construction time; at a cost of $700 million. They are also predicting one quarter from finish to initial production.
• Beyond Phase II, they are currently considering a further 10 kT/yr additonal expansion to start at end of 2008.

MSetek:

• This company is traditionally quiet and its presentation was even more devoid of new information:
  • “we have no issues in construction and rampup to date”
  • “we were fortunate in getting equipment ordered in time” [before the real rush started: equipment delays are reportedly a major issue for emerging polyproducers]
• MSetec expects its capacity to reach 4 kT/yr in 2008

Companies Developing UMG (Upgraded Metallurgical Grade) Silicon:

Data from the following companies were surprisingly strong, leading some to reassess UMG producers as a potential future threat to traditional poly manufacturers.

Dow Corning:

• Dow Corning is putting increasing effort in UMG research to balance their exposure to the field (Dow Corning is also the majority owner of Hemlock, which offers traditional polySi)
• Comparing UMG to Poly:
  • Significantly lower capital cost
  • Much faster rampup time in production
  • Lower energy consumption; lower cost overall
• Progress and Plans:
• PV 1101 MG Si: first generation UMG Si line.
  • Complementary to high purity virgin poly
  • Can be blended with virgin poly (at 10%)
  • Next generation of UMG Si underway:
• PV 1201 and PV 1301 coming in next years:
  • Higher purity allows for less blending (>25% and >80%, respectively]
• Dow Corning estimates that their total production capacity (for all three generations) will be around 10 kT/yr around 2010

Elkem Solar:

• This company presented strong data on their UMG research:
• Pilot production underway with initial data suggesting no blending necessary (their UMG Si can be used as a standalone instead of virgin poly).
• Productions plant construction is to be completed with a startup in late 2008; Rampup occurring during 2009
• 5000 kT capacity; $3 Bn NOK invested.
• 100% of Plant 1 capacity sold until 2012 to Q-Cells and another company
• 50% of Plant 1 capacity sold 2012-18 to Q-Cells
• Elkem is targeting an ultimate cost of around $20/kg
• Q-Cells has option to buy 5000 T from Plant 2 in 20111-18

Timminco:

• They currently have a for 3.6 kT/yr capacity plant which has cost $24 million in capital expenses.
• All of 2008 production is sold out.
• Rapid rampup projected
  • Additional $65m investment will increase capacity to 14 kT/yr by end of Q2/09
  • Production expected in 2009: 12.5 kT; 14.4 kT in 2010 and 2011 [presumably these numbers will increase if orders pick up].
• 90 tonnes of UMG shipped to customers to date. Timminco’s product requires blending with virgin poly.
• Timminco have 5 customers under fixed price contract; another 19 companies are currently testing their product.

Globe Specialty Metals:

• LSE-listed specialty metals company with revenues of $350 mill in 2007
• Globe supplies 12% of Si globally; and have 25% of the western market..
• To put the total silicon market in perspective:
  • Chemical industry uses 580 kT annually
  • Aluminum industry uses 740 kT annually
  • The solar industry uses 50 kT annually [at much higher purity].
  • In terms of growth, the Chemical and Aluminum side are growing at 6 % CAGR; whereas the PV industry is expected to grow at 48% from 2005 to 2012
• Providing silicon, Globe is therefore upstream in solar value chain: they make Metallurgical Grade silicon, which is the starting point for both poly Si and UMG Si.
• Globe is now integrating downstream, by recently acquiring SolSil; a company that will be making UMG Si.
• SolSil:
  • Have been developing technology and making UMG Si since 2006
  • Founded by Globe managers; raised capital externally, now incorporating into Globe after taking away some risks
  • SolSil is currently supplying “toptier PV manufacturers”, but their capacity is low, at 360 T/yr
  • Uses internally developed proprietary prcesses; to date $25m spent on R&D
  • “Best in Class” UMG Si producer according to tests of their and competitors products, in terms of purity.
  • The UMG Si can currently can be used by some clients without blending in virgin poly Si, but not by others.

LDK presented in the session for upcoming Poly Si producers. Mr. Nick Sarno reviewed photos and progress from the construction of their major 15 kT polySi plant:

• Initial team together, and growing
• The production and TCS will be a closed loop system: the company stressed that environmental issues are taken very seriously
• They also provided Master Project Schedule:
  • Reactor Line 1 building is to be completed by end of April
  • Engineering, Utilities and infrastructure completion expected by end of December 2008
  • Line 1 of the poly manufacturing [with a 5 kT capacity], including the TCS portion, is to be mechanically completed by the end of 2008
  • Line 2 follows by mid-June, 2009
  • Line 3 is to be ready by the end of July -09
• Equipment ordered and deliveries are expected throughout the year. No delays reported as of yet, though such have been experienced by others in the industry.
• Planning focus is currently on operational readiness plan: getting ready for production; hiring, etc.
• In Q&A, Mr. Sarno said his biggest concerns were the possibility of equipment delays, and the risk of cost overruns.

Panel Discussion

At the end of the day, a number of questions were put by the moderator, Ms. Anne Kreutzmann from Photon Magazine, to a group of large companies.

“Predictions for 2010?”

Rogol:

• 190 kT of poly will be produced
• “we have underestimated actual production for each of the past 5 yrs in a row: it is quite likely that we are underestimating by another 20%”
• Rogol pointed out that everyone on panel has increased their estimates this year compared to last.
• When asked what can scuttle the market, Mr. Sogol said that an oversupply situation will only occur if or when the German market saturates. “This will not happen soon” [by 2010].

Homan (Hemlock):

• Mr. Homan believes the market prices WILL be tested and that there is a potential for oversupply. He predicted 120-130 kT produced in 2010.
• He reiterated that they believe there is enough poly Si at present to allow for a 80% growth in solar output this year.
• “the question is, if there is surplus: who will get it or use it? What type of Si is available [UMG or virgin?] Who controls it?”

Bye [REC]:

• Predicted 100-110 kT produced in 2010
• Any oversupply will affect downstream players first. Watch for inventory buildup. Poly Si contracts already priced for 2010 for most producers.

How do established poly Si producers look at UMG Si?

Homan:

• Not worried; he thinks that UMG is complementary, not replacement [a notion also provided by the Hemlock parent, Dow Corning]
• Mr. Homan also implied that the cost of ownership (or cost per kWh) is equivalent or higher with UMG, especially if virgin price coming down. This is because of UMG Si’s currently lower conversion efficiencies and lower stability/shorter life.

Predictions on price changes for 2010?

Rogol:

• Poly price will not move until oversupply happens; and it will take some time until oversupply on the downstream side reach the polyproducers.
• Predicted that demand will remain high until at least Germany saturates. Price will therefore remain high.

Homan:

• Disagrees with Rogol on the pricing outlook.
• Hemlock is preparing for coming price reductions by investing so that costs can be lowered to 50% of today. Mr. Homan also argued that costs, in fact, must be lowered to ensure that the solar industry will continue to grow.

Bye:

• 50% cost cutting project underway [2005-10]

Will prepayments be refunded if oversupply happens, pushing margins downstream?

What happens if panel prices fall: will Si prices be lowered?

Homan:

• No details, but indicated that they are working on it; want to work with customers
• “Misinformation exists…” [implying that their contracts allow for help if prices fall.] “we and our customers are comfortable with situation”

Rogol Summing Up

• VERY convinced that high production will be achieved. Mr Rogol pointed out the obvious: just the 13 companies presenting on this conference have 200kT prod for 2010: another 160 companies exist.
• There is much better knowledge about how to make Si this year than last; people are delivering. “‘secret sauce’ of making poly is becoming closer to a recipe”.
• MG Si [ie, the starting material for both UMG Si and Poly Si]: tighter supply coming. This will increase the cost of MG Si.
• UMG Si is becoming a plausible challenger to poly SI, but he was not sure at present what would be the real impact on virgin poly makers.

Our comments

• Most presenters believe the pricing will remain high for several years, because of continued strong demand and existing longterm contracts.
  • This may well be correct, but we need to keep in mind that it is in the industry’s interest to keep the message out that supplies are tight and prices must be high.
• The contrarian view also exists:
  • Hemlock is saying that there is sufficient poly being produced in 2008 to enable the solar industry to grow by 80%; a higher rate than we have had so far.
  • It is a fact that already in 2007, it was established that the actual poly output must have been higher than what was officially provided – there may be more poly on the market than what is let on.
  • (That said, Hemlock’s prediction could equally well be an attempt at reducing the interest of additional new players entering the market, and thus becoming competitors.)
• Established polySi producers will likely continue to have some very good years. What are they going to do with all the cash? It is quite possible that we will see continued downstream integrations, especially in a coming industry shakeout when weaker cell and module manufacturers will become available.
• The key argument and basis for bullish models is the assumption that demand for solar panels is highly elastic if and when the prices come down - with an enormous spike in demand in the region of $2-2.50/W.
  • This sudden spike is the only way that all the new supply of poly, wafers, modules etc, will have a chance of being absorbed – there is too much new production coming underway.
  • At the conference, there was unfortunately no discussion or information provided as to how certain this elasticity is.
  • We believe there is a good chance that the road will be considerably bumpier, given the complex nature of price movements, of demand, and the inefficiency of the value chain (there is virtually no company that can actually produce the whole chain at the required prices). Size, market share, integration and low-cost production will be very important to surviving the coming shakeout.
• The big surprise this year was the strong data presented by some UMG-Si producers. This could be a very viable threat to traditional polySi manufacturers (and perhaps to thinfilm companies too), since this material can readily work its way into the traditional polySi products.
• For LDK, the conference data reinforce need to get inhouse polySi production up and running as fast as possible. In addition, as larger companies (and some of LDK’s customers) increasingly get into upstream activities including wafer manufacturing, LDK may be forced to integrate further to stay competitive, within the confines of their existing client relationships and agreements.

Disclosure: Authors hold long positions in LDK

Comments

[gebby]

analysis of over supply does not consider mandated demand in united states. the analysis is flawed. solar group will out perform all other sectors in stock market yet the analysis is predicting when demand is saturated. wont happen. demand will be so great. the analyst have not even started comprehending this.

[HaroldKramer]

I agree with gebby. I am looking forward to a Democratic administration with a Democratic majority in Congress, led by Nancy Pelosi and Barbara Boxer of California who will push alt. energy very aggresively. This country is still the mother load for energy. China will wait for "grid parity" to occur before they start putting serious money into solar. Solar demand will be totally awesome in 5 years.

[nikeita]

shamshow, why you affirm he is short? disclosure say the opposite.