Nightfall Comes to Solar Land

A YEAR AGO, REFINED silicon for solar cells cost 450 bucks a kilo on the spot market. You can have it today for closer to 100 and if you wait a month it may be cheaper still. Thanks to the workings of international capitalism, the 90% margins available in last year's market spurred silicon-factory expansions around the planet. But the new supply arrived just as end-market demand for solar panels got eclipsed by faltering government incentives, lower oil prices and the world financial freeze.

Cheaper solar silicon is of course a great thing for the planet's living creatures. But solar companies and investors who planned for silicon that was scarce and high-priced must adjust their business models for a glut that looms larger than most anyone expected. New government subsidies will help in the U.S. and in China, which energized solar stocks last week with a plan to help China's struggling photovoltaic industry. Lower prices will also stimulate sales volumes as solar panels become cost-competitive with fossil-fueled power. The question is whether solar energy's volume producers will end up resembling the high-margined Intel or the profitless memory-chip makers. "An industry with 30 suppliers would be a nightmare," says analyst Dan Ries of the brokerage firm Collins Stewart. The "flash-memory market managed to be a nightmare with just 2½ suppliers."

The memory-chip analogy seems most apt. Barron's duly warned readers last summer ("Forecast: Clouds With Sunshine," July 21) that supply/demand shifts would hit silicon producers like MEMC Electronic Materials (ticker: WFR), which subsequently lost two-thirds of its value. But we supposed that some solar power firms would escape harm. Now it looks as if silicon panels could become so cheap that they even take share from technologies that were lower-cost substitutes -- namely, the "thin film" solar panels promoted by First Solar (FSLR) and Energy Conversion Devices (ENER).

A key selling point of thin-film panels is their reduced use of costly materials like silicon: a 97% reduction, in most thin-film technologies. Now that silicon is cheaper, First Solar is hustling around to investor conferences explaining how it aims to fly under silicon's descending cloud ceiling (see the bottom chart to the left). Some silicon panels have already become cheaper than the products of Energy Conversion. Sadly, First Solar's margins and its premium stock multiple of 22 times this year's estimates seem fated to decline. Energy Conversion will likely revert to the losses that dogged it for almost 50 years, leaving little solid value in the 15.77 stock except its net cash of $3.30 a share. Neither company responded to our repeated inquiries aboutcheap silicon.

From the start of the transistor era in the 1950s, the price of purified silicon mainly rose and fell with the tides of the semiconductor industry. Then in 2003, Germany jump-started a worldwide solar boom with an environmental imperative that its utilities subsidize solar-power providers. That one nation's utility customers underwrote half the world's solar panel sales until 2008, when even richer incentives appeared in Spain. In just August and September of last year, Spain's solar developers hooked up over a gigawatt of solar modules -- equivalent to the output of a small nuclear plant. "Spain last year was essentially Germany on steroids," says Daniel Englander, a researcher with Greentech Media. "They were willing to pay a euro per watt more than the Germans were...which totally messed-up pricing."

Those guarantees sent developers scrambling for solar panels, and sent solar-panel makers like SunPower (SPWRA), Q-Cells (QCEL) and Suntech Power (STP) scrambling for silicon. In the three years through June of last year, module maker Yingli Green Energy (YGE) reported that its contract price for silicon rose over 400%. It was a heady time to be a silicon refiner. With production costs of $30 to $40 per kilo, sales at spot- market prices of $450 could yield 90% margins for low-cost producers like Hemlock Semiconductor (a joint venture of Dow Corning and Japanese partners), Wacker-Chemie (WCH.Germany) or MEMC. Cash-flow margins for Munich-based Wacker rose last year from 40% to 50%. Even a new manufacturer like China's GCL Silicon Technology Holdings showed gross margins of more than 75% when it filed a registration to come public in the U.S.