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Silicon Issues Eclipse JA Solar's Growth Prospects

  • JA Solar Holdings LogoThe Company: JA Solar Holdings Co., a China-based developer of photovoltaic solar cells.
  • The Filing: FORM 6-K filed with the SEC on August 18, 2008.
  • The Finding: JA Solar confirmed Wednesday its production guidance in the range of 340-megawatts (MW) to 350MW for fiscal 2008, and remained cautiously optimistic about the potential for raising its 2009 projected output beyond 700 MW at its Ningjin plant. However, it was reported this week that Jiangsu Shunda, a major solar wafer supplier, suffered a silicon tetracholoride leak and was shutting down for repairs until October 10, calling into question JA Solar's ability to meet output goals.
The Upshot: To safeguard against potential shortages of supply caused by market conditions that affect its suppliers, such as Shunda, JA Solar has stepped up engagements of contracting for more monocrystalline silicon wafers than it expects to use. In 2008, the Company entered into a number of multi-year supply agreements with GCL Silicon, M.SETEK, and ReneSola.

To date, although failed deliveries and supply shortages have not had a material effect on JA Solar's output level, they likely will continue to pressure manufacturing costs, for the company competes for [still] limited polysilicon supplies with other solar cell makers like LDK Solar and Solarfun Power. The cost of silicon represents about 91% of the company's aggregate raw material costs.

In addition, to avoid disruptions in its supply chain, the company regularly enters into sales-back contracts with its suppliers. The downside is lower gross margin. In the second-quarter ended June 30, gross profit fell 80 basis points year-on-year to 23.1 percent, due to [lower-margin] solar cell sales back to certain long-term wafer suppliers.

Hindu Prince Gautama Siddharta, the founder of Buddhism, said: "Three things cannot be hidden long: the sun, the moon, and the truth."

And, the truth is -- the hazardous gas leak at the Shunda facility was not an anomaly. In sharp contrast to environmental safeguards in place in the U.S., Chinese companies are allegedly saving millions of dollars by not installing pollution recovery equipment, according to a March 2008 Washington Post story. Ergo, future disruptions in supply will likely lead to continued hiccups in demand/supply dynamics in 2009, too.

Management warned on its earnings call that cell solar prices are expected to drop between 8 percent to 10 percent in 2009.

The Question: Going forward, given expected decline in average selling prices in 2009, uncertainty in silicon wafer supplies and costs, and the global credit crunch, could capital hungry solar manufacturers be forced to scale back capacity expansion plans?

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