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March 27, 2006 China's low-cost labor will make it a world contender in most inexpensively turning raw silicon (pictured here) into solar modules for the global market. Photo: RenewableEnergyAccess.com |
Several Chinese solar companies, in anticipation of a
future capital market transaction, have been stockpiling poly to the order of
hundreds of metric tons. Additionally, we toured a major wafer reclaim facility
that uses low-cost labor to sort and recycle broken/rejected wafers from the
semiconductor and solar industry.
-- Jesse W. Pichel, Senior Research Analyst, Piper Jaffray
We hosted a solar panel discussion at the Piper Jaffray Internet and
Technology Conference in Beijing, China, on March 3, and later met with senior
management and toured five of the top six solar companies in China. We also met
with wafer suppliers in Eastern Europe that supply Chinese solar cell OEMs.
We anticipate that many global solar OEMs are likely to pursue China strategies
following the lead of Ersol Solar Energy AG (which appeared at the Piper Jaffray
Solar conference in NYC on 2/21) with its JV investment in Shanghai Electric
Solar Energy, Ltd. (a module supplier). Conversely, many of the Chinese solar
OEMs may forward integrate by acquiring installers/ integrators in Europe and
the U.S. Despite the blossoming low cost and integrated solar food chain in
China, and several polysilicon feedstock plants that are under construction,
there is no panacea to the current polysilicon shortage. Furthermore, we found
little next-gen (thin film) technology other than a small 5 MW line in Tianjin.
How has our thesis changed? Our thesis remains that investors should focus on
solar companies that offer the promise of lower cost per watt. To that end,
solar companies operating in China will play an important role. However given
that polysilicon, the major cost driver of solar today (raw poly is 40% of
cost), is in short supply with rising prices, we prefer companies that possess
technology that reduces (Evergreen Solar) or eliminates (Energy Conversion
Devices) the need for polysilicon. Also we view polysilicon suppliers as lower
risk solar investments (WFR).
Enormous solar capacity ramp under way in China: Chinese-based
manufacturing will help lower the cost of solar. China has enormous (>1,000 MW)
low-cost manufacturing capacity coming online over three years, and the entire
solar food chain can now be found within China, including polysilicon feedstock,
wafer, cell, and module production in addition to domestic wet-chemistry and
equipment suppliers. In aggregate, the solar companies in China have focused on
module capacity serving historically as an outsourced module- manufacturing
partner. Module capacity of 450 MW will rise to 1200 MW by 2008. The 200 MW of
domestic solar cell making capacity will rise to 1200 MW exiting 2008 with the
ramp of three large cell makers and as certain wafer suppliers forward
integrate. Wafer capacity of 100 MW in 2005 will grow to circa 800 MW by 2008
thanks to the production ramp of domestic polysilicon supply as well as large
poly supply contracts beginning in 2008.
Chinese manufacturing cost advantages: In addition to labor costs that
can be less than $200/month per worker, Chinese solar companies also benefit
from lower SG&A (Sales, General and Administration or 'cost of doing business')
Research & Development, peripheral costs, and tax rate. There is also an
expanding solar manufacturing equipment industry that provides equipment at a
fraction of the cost of equipment made overseas. The current generation of
Chinese manufactured solar equipment includes module lamination, wafer
etch/bath, and mono-crystalline wafer pullers (~$150,000 each). Also there is a
growing list of lower cost wet-chemistry suppliers for slurry and aluminum
paste. Chinese manufacturing lines tend to be more labor intensive and use more
domestic equipment, requiring substantially lower capital expenditure. In
particular, the Chinese module lines we toured do not run automated assembly
equipment and instead favor an all-labor approach; the only equipment required
are laminators and module testers.
No Chinese panacea to polysilicon shortage: Three Chinese polysilicon
manufacturers dominate the domestic landscape. Sichuan Xinguang is still under
construction with initial production in 2007, and 2008 planned capacity of 1,250
metric tons. LSCS now has capacity of ~300 ton, and plans 2007 capacity of 1,000
metric ton. ESM currently has annual polysilicon production of ~100 tons.
Domestic poly production will not address near-term poly needs, as most
production will not come online until 2008. Spot virgin poly prices are now as
high as $200/kg, and many Chinese solar OEMs will happily pay $170/kg to secure
poly. High-grade scrap (ingot tops and tails) command >$150/kg, while lower end
scrap (pot scrap) can command $50-$70/kg. All solar companies are using a mix of
scrap and virgin poly to keep their blended poly cost at ~$130/kg. Several
Chinese solar companies, in anticipation of a future capital market transaction,
have been stockpiling poly to the order of hundreds of metric tons.
Additionally, we toured a major wafer reclaim facility that uses low-cost labor
to sort and recycle broken/ rejected wafers from the semiconductor and solar
industry.
Large domestic demand anticipated beginning in mid-2006: Solar demand in
China is expected to increase significantly over the next several years driven
by the Chinese renewable energy program enacted in February. Although the
government has not communicated the details, the law is expected to generate 500
MW of annual capacity by 2010 ($3.5B USD), 3 GW by 2020, and 60 GW by 2050.
Western China is an ideal location for solar given its 9 to 11 hours of sun per
day (greatest in Tibet). Furthermore, many areas in Western China are off-grid
and the government has an aggressive rural electrification initiative of ~300
MW. While details on the amount of subsidy have not been communicated, we
learned of three large 30 MW solar power station projects planned for 2H06-2007.
The prospect of large solar demand in China is likely to only benefit OEMs in
China or global players with a manufacturing presence/JV in China. We believe
that as funding for Chinese projects are finalized we may see more global OEMs
partner or acquire suppliers in China.
Higher module prices and leading edge wafer thickness: Across industry,
we find that spot module prices are now at $4.20 per watt. Contract prices
remain circa $3.50 and below. In terms of wafer thickness, 240 um thickness is
the norm in China and as a result, some manufacturers can now slice 45 wafers
per kg of silicon (~100W at 10g/W), up from ~40 wafers (~88 W, 11.5 g/W) just
six months ago -- a ~15% energy output improvement per kg. Although wafers can
be sliced <100 um, thinner wafers are fragile and much more difficult to process
into cells and modules.
About the author
Jesse W. Pichel, is Senior Research Analyst, Piper Jaffray & Co., a full-service
brokerage firm based in Minneapolis, member NYSE and SIPC.
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 the securities of Energy Conversion Devices, Evergreen Solar, and
MEMC Electronic Materials at the time this research report was published. Piper
Jaffray will buy and sell these Companies' securities on a principal basis.
Within the past 12 months Piper Jaffray was a managing underwriter of a public
offering of, or dealer manager of a tender offer for, the securities of Energy
Conversion Devices, Inc. or the securities of an affiliate. Piper Jaffray has
received compensation for investment banking services from or has had a client
relationship with Energy Conversion Devices and MEMC Electronic Materials within
the past 12 months. Piper Jaffray expects to receive or intends to seek
compensation for investment banking services from Energy Conversion Devices,
Inc. in the next 3 months. Within the past 3 years Piper Jaffray participated in
a public offering of, or acted as a dealer manager of a tender offer for, Energy
Conversion Devices' and MEMC Electronic Materials' securities.
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