2005 witnessed higher polysilicon costs: The contract price of
polysilicon at $60/kg in 2005 doubled from $30/kg in 2003. For companies
using traditional mono- or polycrystalline silicon wafers in modules (91
percent of industry), the polysilicon feedstock represents 25 percent of
the module BOM (bill of material) in 2005. Despite higher prices, only
80-90 percent of planned production was met in 2005.
For 2006, anticipate limited growth and margin degradation: For
2006 and into 2007 we believe the greatest risk to the solar industry
remains the polysilicon shortage and resulting price increases that may
limit growth and/or degrade margins beginning in 2H06. Only companies that
have secured allocation can grow; only those that have fixed price
contracts will maintain margins. The situation should intensify into 2007.
Contract prices are anticipated to reach 80 per kg in 2007, and the spot
price will remain over $100 per kg. Our supply chain checks confirm that
polysilicon contracts are sold out through 2007. We anticipate that
polysilicon feedstock will rise from 25 percent of BOM to 40 percent by
2007. Only 60-65 percent of planned production will likely be met.
The shortage is most pronounced in 2006, and will cap solar industry
growth at 5 percent: We estimate that solar manufacturers met 80
percent to 90 percent of its 2005 production plans due to polysilicon
stock piles from 2001/2002, resulting in a 30 percent solar industry
growth over 2004 to 1656 MW in 2005. But the picture is bleak for 2006
given that stockpiles are depleted -- we estimate only 13,000 metric tons
of polysilicon will be available for solar cell production. Despite
advances in technology that increases cell efficiency and reduced
polysilicon use, the 13,000 metric ton translates to a mere ~1,500 MW of
crystalline solar cell production. Thus, we believe the solar industry
overall will only grow 5 percent in 2006 to ~1738 MW of total solar cell
production. We have detailed our polysilicon feedstock production
estimates with several polysilicon/wafer/cell manufacturers and industry
consultants. All agreed with a realistic scenario of feedstock CAGR of ~12
percent through 2007. We have detailed our assumptions in the exhibit
below.
Piper Jaffray Solar Industry Production Estimates, 2003-2010E
Source: Piper Jaffray Estimates
POLYSILICON SUPPLY AND DEMAND ANALYSIS
Polysilicon Background
Approximately 94 percent of solar cells are manufactured using crystalline
silicon as the primary raw material. For companies using traditional mono-
or polycrystalline silicon wafers in modules (91 percent of industry),
this is essentially the same ultra-pure silicon material used to
manufacture ICs. Historically, the solar industry has purchased off-spec
material that is rejected by the IC industry, as semiconductors require
much higher purity silicon. However, as the solar industry has grown, its
demand has surpassed the off-spec silicon production. As a result, the
solar industry has been forced to buy IC grade silicon. Currently, SGS is
the only producer of solar grade silicon in substantial volumes.
The polysilicon manufacturing process is highly capital intensive and
requires investments of $200-$250 million for a 3,000 metric ton capacity
that takes 24 months to ramp. Five major manufacturers constitute 88
percent of the world's polysilicon production. These are Hemlock,
Tokuyama, Wacker, REC (subsidiary SGS and ASiMI), and MEMC. The world
capacity is estimated at 30,000 metric tons in 2005.
In 2004, about 65 percent of the polysilicon production was used to
manufacture semiconductors, with the balance being consumed by solar
cells. Due to the semiconductor down cycle in 2001 that saw polysilicon
prices decline below cost to $24/kg, polysilicon manufacturers have been
unwilling to add capacity without purchase agreements.
POLYSILICON MANUFACTURING AND SUPPLY CHAIN
Source: Tokuyama
Polysilicon R&D and Capacity Expansion
The polysilicon industry is enjoying record industry profits.
Additionally, for the first time solar manufacturers are pre-paying for
supply (thanks to recent IPOs) and thus funding poly capacity expansion
that should eliminate the shortage in 2008. Wacker, Tokuyama, and REC have
launched programs to develop processes for manufacturing granular silicon
(fluidized bed reactor for Wacker and REC and vapor to liquid deposition (VLD)
reactor for Tokuyama). Tokuyama is building a 200-ton half commercial VLD
pilot plant in Japan, while Wacker already has a 100-ton FBR pilot plant
in Germany. REC is also looking to build a 200-ton pilot plant in Moses
Lake, WA. In terms of capacity expansion, Wacker is currently expanding
its facility in Germany, Hemlock is adding 3,000 ton of capacity, Tokuyama
is expanding 400 tons in Japan, while REC has a goal to increase SGS to
2,500 tons per year. However, most production will not come online until
2008.
The Raw Polysilicon Feedstock Manufacturing Process
The process for making polysilicon feedstock is commonly referred to as
the Siemens process using a CVD reactor and silane or trichlorosilane gas.
The entire industry uses this CVD process with the exception of MEMC in
Pasadena, Texas, which uses a silane fluid bed reactor that produces
granular polysilicon. (REC at Moses Lake, WA and Wacker in Germany are
both working on fluid bed reactors as is Schumacher Technology). Granular
polysilicon, which fluid bed reactors produce, is desirable since it can
be easily melted to top off the crystal growing crucible, allowing a
longer silicon ingot crystal without the need to shut down the furnace.
Furthermore, granular poly may enable innovations in high-speed,
high-volume solar cell and module manufacturing.
The Case For "Virtual" Integration
While PV manufacturers are accelerating manufacturing process cost
improvements to mitigate rising raw material costs, we believe that the
greatest cost improvement for the PV industry can be attained by ensuring
a consistent, low-cost supply of polysilicon. We suggest an industry
consortium that would mitigate risk in constructing new PV poly capacity.
The latest manufacturing techniques for polysilicon production are fluid
bed reactors including tribromosilane (SiHBr3) fluid bed reactors and
continuous substrate fabrication such as the continuous melt replenishment
(CMR) process. According to industry sources, a $200 million investment
could generate 3,000 ton of Electronic Grade polysilicon per annum, and
supply polysilicon at $20 per kilo. Furthermore, any excess production
could be sold into the IC wafer supply chain. We believe that a select few
solar wafer manufacturers will adopt a virtual integration approach by
investing proceeds from recent financings. In our opinion, this will
enable a sustained competitive advantage.
Editor's Note:
The authors of this article are research analysts at Piper Jaffray & Co.,
a full-service brokerage firm based in Minneapolis, member NYSE and SIPC.
The companies mentioned in this article are not covered by Piper Jaffray's
research department. This article is for informational purposes only and
is not intended to be used as the primary basis of investment decisions.
Because of individual client requirements, it is not, and should not be
construed as, advice designed to meet the particular investment needs of
any investor. This report is not an offer or a solicitation of an offer to
sell or buy any security.
Piper Jaffray was making a market in MEMC Electronic Materials' securities
at the time this research report was published. Piper Jaffray will buy and
sell the Company's securities on a principal basis. Within the past 3
years Piper Jaffray participated in a public offering of, or acted as a
dealer manager of a tender offer for, MEMC Electronic Materials'
securities. Piper Jaffray has received compensation for investment banking
services from or has had a client relationship with MEMC Electronic
Materials within the past 12 months.
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