China Sunergy's Silicon Squeeze

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There's been no fun in the sun for China Sunergy (Nasdaq: CSUN) and its investors. The stock has plunged recently, even as solar module maker First Solar (Nasdaq: FSLR) has soared on news that it signed big new contracts for its finished products. So why's China Sunergy wearing a "kick me" sign?

Last week, China Sunergy reported gloomy preliminary sales and production volume figures for the second quarter. Just as the blazing sun beats down on black leather car seats, so do high polysilicon prices beat down Sunergy's margins. Those expensive polysilicon wafers are the primary raw material for China Sunergy's solar cells, which in turn get fashioned into solar panels.

The company is running at a solar cell production rate of about 100 megawatts (MW) of capacity for this year, based on its projections for a more robust second half of 2007. That's quite substantial -- Google's (Nasdaq: GOOG) planned solar installation, which could power the equivalent of about 1,000 homes, requires only 1.6 MW. This makes China Sunergy's new supply contracts of 16 MW worth of silicon wafers for the remainder of the year look skimpy, and nothing to cheer about.

In fact, I'm not sure how to interpret this statement from the press release: "As a result of the new supply agreements we reached during the second quarter, we are now confident that we will be able to secure our wafer supply requirements for the second half of 2007 and 2008."

See Spot run
Are they telling us that the company previously risked being unable to secure enough wafers, even on the spot market? The company's position with regard to its raw-material needs, which comprise a huge portion of any solar manufacturer's cost of goods sold, looks way too tenuous. If you're eyeing a solar investment, don't ignore the contracted wafer supply figures. I learned from a Motley Fool Rule Breakers interview with the CEO of rival panel-peddler Suntech Power (NYSE: STP) that his company is winnowing down to a mere 30% exposure to the spot market.

The better-positioned company is easy to, er, spot.

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Fool contributor Toby Shute doesn't own shares in any company mentioned. Suntech Power is a Motley Fool Rule Breakers recommendation. There's nothing spotty about the Motley Fool's disclosure policy.