LDK Solar Tripping Over Competitive Hurdles

LDK Solar (LDK), the world's largest producer of multicrystalline solar wafers, is forecasting a significant rebound in demand for its multicrystalline wafers and solar panels in 2010. Contrary to management claims of an improving profit environment, intensifying competition will likely erode average selling prices (ASP) and squeeze operating margins through 2012.

Despite market fears that demand would drop off after incentive cutbacks in essential European markets, such as Germany and Italy, come second-half 2010, chairman and CEO Xiaofeng Peng is calling for wafer and module shipments of 1.7 GW to 1.8 GW and 200 MW to 300 MW, up from 2009 year-ending estimates of 1.1 GW and 34 MW, respectively.

Industry consultant iSupply believes cheaper solar panel prices -- as component suppliers pass along prior year price drops further downstream to photovoltaic (PV) manufacturers -- and declining PV installation costs will stimulate this demand and compensate for Feed-in-Tariff reductions.

LDK is projecting 2010 total sales to be in the range of $1.6 to $1.7 billion. Wall Street analysts had forecasted, on average, sales estimates of $1.4 billion, according to Thomson Reuters.

After eight successive quarterly declines in wafer prices -- from $2.18 per watt in fourth-quarter 2007 to $0.83 per watt at year-end 2009 -- price trends are firming, with wafer prices for the second quarter expected at around $0.85 to $0.90 per watt at the moment, chief financial officer Jack Lai noted on the first-quarter 2010 earnings call.

"The improvement in ASP trends throughout the year should allow us to expand our gross margin in the next few quarters," said Lai on the conference call with investors. Recent polysilicon feedstock prices reportedly below inventoried first-quarter costs of $65 per kilogram should help to boost gross margins in the next few quarters by as much as 300 basis points, up from the 15.7 percent posted in the first quarter, according to Lai.

Firmer prices and falling production costs will help the company repair compressed margins in the next few quarters. In textbook fashion, however, the risk to this optimistic scenario is a dislocation in the cost and price curves for LDK's solar wafers.

"The erosion in pricing is bound to change the face of the solar industry," says iSupply analyst Henning Wicht. "The freefall of PV prices represents a permanent ratcheting down of price structures that will transform the industry into a more competitive marketplace."

Upstart component manufacturers -- principally based in China because of access to cheap government financing, cheaper local labor, and cheapest electricity costs -- are quickly ramping up capacity, with the goal of using aggressive pricing to take market share from more established competitors, like LDK and ReneSola (SOL).

On average, crystalline module and solar wafer prices fell by 37.8 percent and 50 percent in 2009. Contrary to LDK's rosy forecasts, price erosion trends are expected to continue this year, though at a slower rate: crystalline module prices will drop an additional 20 percent and wafer prices will decline by another 18.2 percent, estimates analyst Wicht.

LDK management believes it can stay competitive, grow market share, and relieve margin pressures. At an April investor event held at LDK's main solar wafer manufacturing complex in Xinyu City, China, chairman and CEO Peng said the company is is talking process cost reductions of approximately 15 percent per annum through 2012:

• Scaling wafer capacity to 2.2 GW in the second half of 2010, reaching 2.6GW by the end of 2011;
• Improving multicrystalline solar cell efficiency toward a targeted 19 and 21 percent by 2014, up from 16 and 17 percent; and,
• Focusing on additional gains on productivity from higher throughput yields (larger ingots and thinner wafers), advances in cell fabrication architecture (such as increased automation and reduction in multi-step processes), lower polysilicon feedstock prices (staying at or below current spot prices of $60 per kilogram), sourcing more than 50 percent of consumables and equipment needs (such as ingot furnaces and crucibles) closer to home, and reducing silicon waste (such as a 20% gain in recovered slurry).

Irrespective of LDK's objective to squeeze the last drop of profitability from manufacturing gains, the company won't be able to consistently control its gross margins, as wafer manufacturing is stumbling toward a fall over the same commodity cliff encountered by semiconductor makers years ago. "The pure wafer business is a siren's call," says iSupply's Wicht.

In reality, producing a wafer is not technically beyond the capability of either the polysilicon suppliers or the cell producer. Eventually, then, both polysilicon and cell producers will try to drain all the profit out of this level of the supply chain.

Repeated observations suggest that one shouldn't expect much of a leap downstream from Chairman Peng and his Standing Committee. For example, management has been reticent on recent policy announcements from government officials intimating that China is backing away from previously announced multi-million megawatt solar power projects. To borrow from the comedian Lilly Tomlin: "The road to success is always under construction." Truer words couldn't describe LDK Solar's future outlook.

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