First Solar Inc. (NASDAQ: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.