Solid opportunities to invest in the solar boom exist, but many investors are starting to worry about the high valuation of stocks in the solar industry. Many feel that the worldwide silicon shortage is a major threat to solar's growth, but the silicon shortage is leading to a pickup in M&A activity in order to achieve economies of scale. M&A expectations and increased investment demand for ethical investments are pushing valuations higher, making some investors nervous about a potential solar bubble.
Q-Cells (QCEG.DE – €45.29) recently announced a long-term supply agreement with Elkem Solar (a member of Norway's Orkla Group), thus securing supplies of significant quantities of metallurgical silicon until 2018. Q-Cells is the world's second largest solar cell manufacturer with a year-end 2006 nominal production capacity of 420MW (253MW actual 2006 production), which is rapidly growing.
Q-Cells currently manufactures cells using a mix of metallurgical silicon and polysilicon. It would be more efficient for them to make cells entirely from metallurgical silicon, and the company is currently testing ways to achieve this. Metallurgical-based cells could achieve similar efficiencies and yields as cells with traditional polysilicon, but at a lower cost. Q-Cells management hinted that this development has given Q-Cells a significant time-to-market advantage in the use of solar cells manufactured with metallurgical silicon.
Markets pushed Q-Cells shares higher after the announcement of the new supply agreement. In a rather complicated deal, Good Energy Investments sold 12.5% of its 34.36% stake in REC (a manufacturer of silicon wafers, cells and modules) to Orkla, and another 17.9% was sold to Q-Cells in exchange for some shares. In addition, Q-Cells secured supplies of metallurgical silicon from Orkla until 2018.
Current global demand forecasts for solar is seen between 12GWp-14GWp (gigawatt-peak) by 2010. To put this into context, Q-Cells's supply deal is the equivalent of 10GWp of cells. As early as 2010, Q-Cells should have enough material to be able to produce more than 1 GWp of solar cells per year. The security and volume of supply contract means Q-Cells will be a major global player for years to come.
Shares have already gained 50% since the start of January on the back of these developments. Investors are willing to push the shares higher – shares of Q-Cells surged 13% on Feb 5 when the company announced that profit more than doubled in the previous year, and growth would accelerate in 2008 (that was the largest one-day gain on the Stoxx 600 since June 15, 2006).
The surge in Q-Cells shares seems overdone. What happens if the forecasts for global demand for solar are too optimistic? Current global demand for solar is seen at 12GWp-14GWp by 2010, but some say a reading around 5GWp is more realistic (this was the projection of the European and Global Photovoltaic Industry released in Sept 2006). The main problem is that current (optimistic) projections assume that the solar markets will develop at these high rates in all countries. Many industrialized nations still lack clear policies on solar power, making a 12GWp-14GWp projection by 2010 unrealistic.
If the current demand projections turn out to be too optimistic, silicon will move from undersupply (with inflated margins and prices) to massive oversupply (with falling margins and prices). This could prove to be damaging for Q-Cells, as there is a real concern here that the Orkla contract might be overpriced. With a supply contract fixed until 2018, Q-Cells might just become the first casualty of a solar boom.
Disclaimer: I do not own any stocks mentioned above. I do not give investment advice. Do your own research. Do not rely on anything in this blog to make investment decisions. Consult an investment professional familiar with your specific financial situation before buying or selling any security.