The Latest Challenge for Solar

The price of solar modules has been falling all year, putting pressure on solar manufacturers. But falling polysilicon prices have put even more pressure on some of the most leveraged companies in the industry.

According to Bloomberg, the price of polysilicon has fallen 8.8% in the past week to $40.51 per kilogram. The pressure put on suppliers such as MEMC Electronic Materials (NYSE: WFR  ) , LDK Solar (NYSE: LDK  ) , and JA Solar (Nasdaq: JASO  ) in the second quarter is likely to become worse in the third and fourth quarter.

It also means suppliers such as GT Advanced Technologies (Nasdaq: GTAT  ) will be receiving fewer orders long-term as the industry sorts out this oversupply.

Good for some
The falling cost of polysilicon isn't bad news for all companies. Not all companies make all of their own polysilicon, and falling costs for third-party polysilicon can mean lower costs and higher margins for some manufacturers.

Many of the largest module producers make little to none of their own polysilicon, something that could create expanded margins in the future. Last quarter, SunPower (Nasdaq: SPWRA  ) paid $32.5 million to terminate a third-party cell-supply contract, something that may pay off in the end. Two of the largest manufacturers, Suntech Power (NYSE: STP  ) and Trina Solar (NYSE: TSL  ) , buy a large percentage of their wafer capacity.

Foolish bottom line
Falling module prices mean cells, wafers, and polysilicon will all be put under pressure in the coming quarters. It looks as if companies that focus on polysilicon will take the brunt of it first, but this could provide opportunities for companies focused on module and cell production. Polysilicon is one of the main costs in a solar panel, and if prices remain low, as they are today, these companies would be the biggest winners.

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Fool contributor Travis Hoium owns shares of SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

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Read/Post Comments (5) | Recommend This Article (4)

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  • Report this Comment On October 13, 2011, at 7:03 PM, phoenixinvestor1 wrote:

    To the contrary, silicon manufacturers have been inundating GTAT with new orders for silicon furnaces which GCL Poly says will reduce its production cost to sub $18/kg by y/e. GTAT has now become the largest supplier of furnaces for sapphire crystals used for LED's and has doubled its order book to $2.3 billion in a year. Low capex requirements, no net debt, 27 million share buyback last year make GT Advanced Technolgy a standout co with half it's sales to the Solar industry.

  • Report this Comment On October 13, 2011, at 8:54 PM, TMFFlushDraw wrote:

    @phoenixinvestor1

    The rate at which GTAT has been getting orders has slowed in recent months. I just feel that there is a lot of oversupply that needs to be sorted out on equipment that is sunk cost, even though newer equipment may provide lower costs per kilo.

    And yes, as I've noted on this site before the sapphire crystal business for LEDs has become a growing part of the company's business.

    Travis Hoium

  • Report this Comment On October 13, 2011, at 9:27 PM, phoenixinvestor1 wrote:

    Do you have any supportive evidence that order growth has slowed, if so is it for silicon furnaces or sapphire equipment. The company stated in August that order backlog is $2.3 billion which represents 2 years of sales at margins of over 40%. How does the August acquisition of Confluence Technologies provide opportunites for growth. The acquisition of Crystal Systems in 2010 resulted in backlog growth from $16 million to over $900 million in one year. That is more than just a "growing part" of the business.

    Your analysis is not supported by 9 of 12 analysts who rate GTAT as either Strong Buy or Buy with a consensus target of $16. The reported borrowed share position is 33 million and 22 million reported short. Institutions hold 101.4% of the stock suggesting the shorts are carrying everyone else.

  • Report this Comment On October 14, 2011, at 2:09 AM, phoenixinvestor1 wrote:

    I noticed a recent pick is WTI. I totally agree with your analysis on WTI as being an undervalued Oil & Gas stock. I applied exactly the same analysis to GTAT to come to the conclusion that it is an equally undervalued situation. The primary difference is that Tracy Krohn owns 53% of WTI and determines its strategy and long term plans. Like GTAT the shorts are funding the entire retail and other holders of the stock. GTAT is a stock awaiting a takeover bid. It is widely held with FMR the largest shareholder. GE comes to mind but it is target that could bring accretive earnings and meaningful increase to the order backlog of any large worldwide organization. The ability of its management to penetrate Asian markets with lightspeed is astounding and obviously has leapfrogged well established European and American competitors in its legacy business. Silicon is the base, sapphire is in play and I suspect the next game changing play is not far away.

  • Report this Comment On October 14, 2011, at 10:46 AM, yitbos121 wrote:

    Hi Travis..I too, am anxious to know the source of your confidence that orders have slowed in recent months..all releases by the company have supported conservative guidance...eg. no monocast upgrades are figured into their expectations for FY 2012 http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9M...

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