I like to catch up on my reading while on the subway on the way to work (Warren Buffet once said that Wall Street is the only place that people ride to work in a Rolls Royce to get advice from those who take the subway). I came across an interesting article discussing the polysilicon shortage choking the growth of the solar industry.
Photo: cottergarage , Creative Commons, Flickr
Although the solar energy market grew by 30% last year, its growth is currently being held back by the shortage of polysilicon. How long will this supply problem last, and how can long term investors position themselves? There is a lack of consensus on the issue, creating an opportunity for long term investors willing to place their bets.
Forecasts for the end of the shortage range from 2008 until 2010 and beyond, and we will have to consider two scenarios:
Scenario 1: If the polysilicon shortage continues longer than expected (in my opinion, the least likely scenario), pricing power will remain with the upstream players. In this scenario, stocks like Evergreen Solar (ESLR – $8.96), DTS Inc (DSTI – $22.31) , MEMC Electronic (WFR – $57.91) and First Solar (FSLR – $63.58) will be the winners.
Scenario 2: The market will see more supply sooner than expected with polsysilicon prices stabilizing (in my opinion, the most likely scenario). In this case winners will include the likes of (SPWR- $53.93),Trina Solar ADR (TSL -$52.95), SunTech Power (STP – $35.80) and Solarfun Power (SOLF – $12.36).
Manufacturing polysilicon isn’t rocket science. Considering the buzz surrounding the possibilities of solar energy, there is a real possibility that capacity may expand too rapidly, and silicon will move from under-supply (with inflated margins and prices for upstream companies) to massive oversupply (with falling margins and prices for upstream companies). Chinese polysilicon suppliers should also help with the supply constraints, with the Suntech Power CEO, Zhengrong Shi, recently saying that he expects about five or more new polysilicon manufacturers in China in the next year or two.
I believe that the question is not just about supply, but also about technological innovation. In the latest issue of Red Herring, Andrea Quong writes about a revived silicon-making technology that could be a boon for the solar industry. Scientists at SRI International, a California-based nonprofit research institute, have revived an old technology to make solar-grade silicon more cheaply. SRIs techniques claim to make solar-grade silicon for $14 per kilogram, less than half the price of competing technologies currently available. SRI’s technology has only been used in the lab, but companies are eager to use new technologies with polysilicon prices skyrocketing.
This issue at hand isn’t just about polysilicon supply, but also technological innovation. New technologies (like SRI International’s techniques) offer opportunities for downstream solar companies to cope with the polysilicon shortage, and could erode the pricing power of the upstream players. We could see more of these technologies being developed over the coming months, adding credibility to the idea that investors should be placing their bets on the downstream companies.
Disclosure: I do not own any of the stocks mentioned above. I do not own any solar panels.