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SunEdison Inc's FBR-Polysilicon Adventure Towards An End?

|Includes: GCPEF, RNWEF, SEMI, SunEdison, Inc. (SUNEQ)

The expected SunEdison Bankruptcy preceedings has caused havoc and amazement within the solar industry. Its effects are now analyzed it all directions.

I will limit this post to SunEdison's polysilicon adventure. I also appologize for the language quality as english is not my native language.

SunEdison Inc (formerly Memc) was one of the pioneers of the polysilicon industry. Polysilicon belongs at the bottom of a value chain that providing solar modules in one of the world's most rapid expanding industries. Solar industry today may be compared with the emergence of the automobile industry, with juvenile obsticles and balancing problems throughout the value chain prior to its coming of age. Returning to SunEdison Inc, it developed its own FBR-technology which today is the successor of the Modified Siemens-teknology currently dominating the industry. Indeed, SunEdison was especially proud and had big ambitions for its new HP-FBR technology.

Rewinding a few years, SunEdison's CEO Ahmad Chatila sought world domination in megalomanic claims of the company's superiority and ambitions. Now, we may look at the claims in perspective.

In its glorydays, CEO Chatila wanted to build large polysilicon FBR-plants in Ulsan, South Korea (in progress), Saudi Arabia, China and India. The latter three claims never were substantiated and even more funny, SunEdison was ditched by its potential partner in India. Furthermore, SunEdison has not demonstrated that its HP-FBR technology works, its Ulsan Plant is becoming a showcase of delays and increasing risk of failure.

Granted that HP-FBR is a technology which may be successful, SunEdison failed to demonstrate the technology in a successful pilotprogram and has still failed to report full commercial production at its new Ulsan Plant in South Korea. HP-FBR is theory! Using gigantic reactors of 5,000 MT a year, SunEdison's HP-FBR is a complicated production process which they hoped to easily scale up. As expected SunEdison hit obsticles in stabalizing its production process in such a large scale. In contrast, GCL is using a 3,000 MT reactor while REC Silicon is using a 2,000 MT reactor - the latter also having successfully completed pilot for next generation FBR-technology soon to complete a new plant in Yulin, China.

Intitially, SunEdison was a traditional producer with limited capacity as its competitors rapidly expanded. SunEdsion closed its Modified Siemens plant in Italy, unable to compete. However, it retained its old FBR-plant in Pasadena, Texas which had a place of honor within the industry. This FRB-plant could produce high quality granules but its cash-cost was not optimal. In 2015, CEO Chatila finally announced that this plant had become obsolete and was to be closed. A major chapter in SunEdison Inc and polysilicon history was closed. With that SunEdison Inc pursuing capacity expansion had de facto reduced its capacity in Italy and the US.

Now, during the years CEO Chatila had been boasting heavily about new capacity coming online in the future. Indeed, the entire polysilicon market and its average sales prices (NYSE:ASP) has plummeted on news and anticipations about future cheap semi-grade polysilicon coming from companies like SunEdison. ASP has hit record low in 2015/2016 for various reasons, including anticipated new capacity which became heavily delayed.

The flaggship of SunEdsion was its new Ulsan Plant in South Korea with its new HP-FBR technology. Initially, 10,000 MT was planned later expanded to 13,500 MT. It was shedueled to start commercial production in 2014, was then delayed into 2015 and is still delayed as we have entered 2016. We may question if SunEdsion facing bankrupcy will be able to financially complete this plant successfully. Then I disregarrd the fact that SunEdison has to also solve the technical problems in stabilizing its FBR-production process to acheive full commercial production - this requires a lot of extra money to repair! Does SunEdison have the money to complete Ulsan? Are they mechanically able to acheive commercial production? If the answer to one of these two questions are "no" then Ulsan may be abandoned altogether. The polysilicon industry will then be faced with a severe setback in its low-cost semi-grade polysilicon dream and there will be polysilicon shortage which currently is not expected in years to come. Remember that the market has anticipated this capacity for years.

Problems at Ulsan have been visibile for long. The JV company started off as a 50/50 between SunEdison Inc and Samsung Fine Chemicals... However, Samsung then reduced its share of the JV to 15 %. SunEdison which followed a light-asset policy suddenly owned 85 % of the plant which still did not demonstrate its capability to commercial production. If the plant would be successful, Samsung would hardly have reduced its share...

In 2014 delays became apparent but SunEdison remained optimistic. In fact, we almost got no news about the progress as SunEdison tried to cover up the impression of success. SunEdison also established an IPO where they sold off SunEdison Semiconductor (NASDAQ:SEMI). SunEdison Inc (SUNE) was moving away from the polysilicon/wafer part of the industry, focusing on the top with installations. With the IPO, SEMI also got 35 % of the Ulsan Plant. SunEdison Inc was consequently reducing its exposure to polysilicon/wafer and generate cash from these assets. Today, SUNE has 50 % of the Ulsan Plant. Does it even make sense for SunEdison to complete the plant given the current situation?

As the plant is still not commercially online, all the red lights are flaring up.

While SEMI in its reporting has highlighted the risks with Ulsan, CEO Chatila in SUNE was still painting a bright picture of Ulsan Plant in vague claims in his last reporting. The problem now is that CEO Chatila has been painting a picture which fails to materialize in reality. This inability of be realistic and share important status reports about the plant's progress is only making it more clear that the plant has big mechanical problems which continues to be unresolved. Fueld by the problems SunEdison Inc is facing now, financing the repairs necessary to overcome the mechanical problems are both difficult and risiki - something the creditors of SunEdison must decide can be continued. Are SunEdison to spend more money in hope to fix the plant, or do they have to accept a heavy hit loss in abandoning the plant in its final stage.

If Ulsan Plant fails, SunEdison Inc is no longer in the polysilicon industry - only retaining its patents to the HP FBR-technology. If SunEdison survives it will be cripled. However, they may consider an alliance with REC Silicon as the two FBR-technologies might complement each other. As SunEdison Inc leaves polysilicon/wafer, it may consider replacing its assets with REC. This is just a thought.

For the polysilicon industry, SunEdison Inc was to become a big player producing low cost semi-grade polysilicon in the US, in South Korea, in Saudi Arabia, in China and in India. Until now, capacity has been reduced. The question remains if the 13,500 MT at Ulsan will survive. The polysilicon industry must revise its roadmaps as the supply-chain is entering major shortage in 2017 onwards. It takes 2-3 years to complete a new plant, it requires a high capex to build a FBR-plant capable of providing the cheap low cost semi-grade polysilicon necessary to drive down total costs throughout the value chain. Today, only GCL Poly and REC Silicon have the technology. GCL is using its FBR in its in-house-production of wafer, while REC Silicon is the only major provider in the spot market. Any wafer-producer with amibions must use FBR going forward in order to compete. SunEdison has been important for the FBR-technology, and its is important that a potential bankruptcy may preserve some of what SunEdison has provided to the industry. This is like a Greek Tragedy for SunEdison :/

Disclaimer: Please note that I own shares in REC Silicon. I currently have no shares in SunEdison nor the other companies mentioned.

Disclosure: I am/we are long RNWEF.

Additional disclosure: Please note that I own long term shares in REC Silicon. I currently have no shares in SunEdison nor other companies mentioned.