Markets

Newswires Mislead on Solarfun Supply Contract

By David Phillips

Updated on: July 9, 2008 / 4:10 PM EDT / MoneyWatch

The Company: Solarfun Power Holdings, a vertically integrated manufacturer of silicon ingots and photovoltaic modules in Shanghai.
The Filing: A Form 6-K filed on June 30, 2008, with the SEC.
The Finding: Reuters, AP, et al., report that GCL Silicon Technology (Zhongneng) will supply Solarfun with virgin polysilicon sufficient to produce approximately 1.2 gigawatts of solar modules in aggregate over eight years. Contrary to suggested reports, this agreement will neither improve visibility of the company's long-term polysilicon supplies nor help to reduce raw material costs.

The Upshot: Refined silicon has been in short supply for more than four years now, and the demand imbalance is not expected to ease until 2012. Contrary to expressed optimism, the constraint problem facing Solarfun -- common to most photovoltaic makers -- will continue to depress gross profits and capacity growth in coming quarters.

PV module shipments showed good momentum for the first quarter ended March 31, reaching 40.3 megawatts, which represented 40 percent growth over last quarter and a 517 percent increase from the first quarter last year.

However, gross margin in the first quarter of 2008 decreased to 16.5 percent from 17.2 percent in the first quarter of 2007, largely attributable to the continued shortage and higher costs of silicon-based materials in the first quarter of 2008.

Harold Hoskens, chief executive of Solarfun, believes the GCL agreement will improve the visibility of its long-term polysilicon supply and help to reduce costs.

In addition, to ensure a stable supply of silicon ingots, Solarfun announced it was buying the remaining 48 percent equity interest in a manufacturing plant, Yangguang Solar, that it did not previously own for $51.5 million.

Hoskens said the two deals deal will help the company to meet expected shipments in the range of 160-180 megawatts for 2008, up from 99.6 megawatts last year.

In a June 2007 polysilicon agreement, Solarfun's manufacturing plant contracted with Zhongneng to supply 50 tons in 2007, 700 tons in 2008, and 1,200 tons in 2009, according to a registration statement filed on June 27 with the SEC.

The actual delivered quantity in 2007 was 27 tons in 2007, and based upon this decreased delivery volume in 2007, it is expected that the amounts to be delivered in 2008 and 2009 would be significantly less, too.

Solarfun will likely need to access requisite silicon supplies on the spot market, where prices still hover around $400 per kilogram.

(This troubling lack of transparency -- common to many China-based companies -- will be discussed further in tomorrow's column.)

The Question: Can any of you news hounds or industry watchers tell me how the GCL contract is of any value to Solarfun? Isn't it just a restatement of an existing -- and unfulfilled -- contract?