SolarPVInvestor Forums

Can you make sure you post company specific info under the company's thread? I will move this one over but let's make sure proper thread receives the post.

Quoted from "eysteinh"

http://www.displaysearchblog.com/2012/05…polysilicon-go/

"In its May 11 Q1’12 earnings release, ReneSola indicated that in-house fully-loaded polysilicon manufacturing costs had been reduced to $30/Kg and are expected to fall to $25/Kg ($18/Kg cash costs) by the end of Q2’12. The company’s Phase II facility is projected to have total costs less than $20/Kg when ramped up in the second half of this year. ReneSola has also indicated that it possess proprietary technology capable of enabling $10/Kg polysilicon in the future."

Can anyone confirm this?

I haven't heard the 10 $/kg, but the phase II cost target is outdated. They improved the target every quarter past 4 quarters. Latest target is $18 total, which would mean $16 for phase II. In last quarter they reported major improvement that would cut electricity price with 40%, enabling the $18 total, including $5 depreciation, but not including SG&A.

The 10 $/kg sounds strange and it would be valuable to get confirmation on whether that's correct or false.

Another thing that would be interesting to know about is the background to the gross margin chart on their blog entry today: http://info.renesola.com/

The chart suggests SOL will outperform on gross margin in the future.

Quoted from "explo"

The chart suggests SOL will outperform on gross margin in the future.

No idea where the chart comes from and what quality the underlying analysis has (There is lot of crap out there). However it seems intuitive to me that SOL will reap higher GMs since a big chunk of the business is poly manufacturing and they seem to have a good cost position in it. On the other hand I don't agree with the GM premium for Trina on the chart, thus I question the quality of the analysis altogether.

Quoted from "Klothilde"

Quoted from "explo"

The chart suggests SOL will outperform on gross margin in the future.

No idea where the chart comes from and what quality the underlying analysis has (There is lot of crap out there). However it seems intuitive to me that SOL will reap higher GMs since a big chunk of the business is poly manufacturing and they seem to have a good cost position in it. On the other hand I don't agree with the GM premium for Trina on the chart, thus I question the quality of the analysis altogether.

Found it: http://apgreenjobs.ilo.org/resources/saved/at_download/file1

Original source: http://www.greentechmedia.com/research/report/pv-supply-2012

Looks like one of those reports/analysis that focuses more on quantity than quality of numbers.

On gross margin I agree, best way to get a high gross margin is if you can make poly at low cost. If you can make high quality wafers at low cost you can increase revenue and profits while retaining good gross margin.

This is what GCL has done. Let's call poly and wafer upstream and cell and module the midstream, then EPC and project development the downstream. So having upstream capacity you get a good average gross margin over a full industry cycle, but it can be volatile as relative pricing cycles hardest upstream and underutilization of expensive upstream capacity costs a lot and the outsourced upstream capacity of midstream operators would normally be hit before their in-house capacity. So what GCL does is that it has downstream business where it can secure a channel to the end use for its upstream products, but not only this, since it outsource the midstream it can make a deal with its midstream partners "source X musd wafers from us and we'll source X musd modules from you", which allows them to get a factor on how much each of their MW of downstream business can secure in MW of wafer sales and thus utilization of their upstream capacity.

SOL is doing similar thing, but focus less on projects (for projects they focus on plant ownership very selectively for high IRR rather than large volume EPC) and more on modules and system kits, so their deal with their cell partners is "source X musd wafers from us and we'll source X musd cells from you".


To me these models of capturing the margin benefits of upstream, but mitigating the flipside underutilization risk, have strength. It's a short leap to consider the possibility that GCL and SOL are conducting cell R&D to take that inhouse too, having superior modules and capture all the incremental gross profit in the poly to module value-chain while only having modules sales cost. But this step is not without risk, they need to have modules that are so easy to sell from their superiority that they can sell (after own use for downstream) volumes in the same size as their upstream capacity. Current model allows them to have twice the upstream capacity to their module market-share. So the net effect on profits of doing cells might not be positive unless cell superiority (at least combined with wafer superiority) can be achieved, thus it is a risk to enter that path compared with the safer partnership model they have today.


Klothilde, I would be interested in hearing more about your view on what model you think will accumulate profits best over full cycles (obviously during shortage its poly and during oversupply its EPC, but that does not mean full cycle profit retention, and its the retention power I'm looking for)? If we look at models like Trina and HSOL with inverted pyramid capacity (25% upstream, 100% midstream), which might become more like a diamond if they add EPC and YGE and JKS with full wafer and no poly (50% upstream, 100% midstream), these try to balance outsourcing costs and underutilization costs of upstream capacity. These models work well for that, but stuggels with purchased inventory carrying cost eating up profits and thus curbs the abilty to retain much over a full cycle, since to retain market-share during boom you are forced to build large stocks when component prices are high. These models are designed to enable growth not profits in my opinion. Now that SOL and GCL have cracked the code to super low capex and fast ramping for upstream they'll have the growth ability too at reasonable capital allocation.

My understanding is that you prefer upstream and downstream focus and your stock preference is FSLR. Why FSLR? Technology or project pipeline?

My FSLR investment is about 4 years old and I didn’t give it much thought back then. I’m currently in the process of assessing whether to hold on to the shares. Until 6 months ago I was convinced of a technology advantage relative to c-si. However with Yingli boasting about 45 cents production and FSLR efficiency progress slowing down I’m currently less convinced. I’ll hope to get a clearer view on cost and technology with the next round of quarterly reports. For one I want to see the good ol’ 45 cents of Yingli finally reflected in the COGS. As to FSLR’s focus on project business I think that is a big plus to weather the consolidation but it cannot replace technology as long term value driver.

Regarding your question about the best sustainable cycle model: Imho PV manufacturing is by large a commodity business and as such it calls for complete specialization: Stick to one thing and do it the cheapest way possible through scale, superior technology, superior factor costs and superior process efficiency.

I think that the large diversity in integration and partnering moves that you talk about is completely atypical for a commodity business and only responds to artificial and radical supply / demand imbalances that the industry went through over the last years. From 2008 to 2011 the astronomical incentives in Europe resulted in huge CAGRs of 80-100%, stretching capacity expansion upstream and midstream to the limits and driving margins along these steps to artificially high levels. This prompted Suntech e.g. to dish out huge amounts of money and integrate upstream into wafering. Two years later the pendulum swung into the opposite direction: Now there’s such a radical overcapacity in the market that the players are FORCED to integrate downstream to EPC/project development in order to survive. This too is not a sound long term strategic move but only the response to artificially high capacity expansions two years ago which were motivated by the huge inventives in Europe.

Going forward I find it highly unlikely that the industry will revert back to the supply shortages from 2008-2010 and consequently to the high margins along the supply chain that we had back then. As the industry transitions into the unsubsidized space and away from FIT hotspots, market growth will be more subdued at 25-30% maybe. For sure we will have investment cycles, but price and margin spikes will be less pronounced. Imho this will result in a gradual shift from current diversified and integrated models (defensive moves) to much more specialized models. I can easily envision companies like JA Solar dropping the module and system business and focusing again exclusively on cells.

That said over the next two years and until a healthy supply/demand balance is established diversifying into the project space may be critical for some of the solar 11 in order to survive.

In summary for c-Si I envision oligopolys both in the poly space (4-5 large companies of 50+kt migrating aggressively to FBR), and in the wafer and cell steps. I’m also very keen on the IPP space, where I see tremendous value for established IPP who migrate to solar assets. There is tremendous upside here given the increasing shortage of fossil resources around the world (not necessary in Nebraska).

Klothilde, thank you for your very insightful view.

When you invested in FSLR was about the time I started to invest in solar too. I made a strategic choice back then to bet on the Chinese group. The main reason for this was their low overhead costs. Although a bit behind on production cost efficiency at the time, I thought they would catch up and close this gap. I would say this has come true, but they've at the same time closed the opex gap a bit too which is a bit disappointing. Still it remains to see who will prevail. It looks like c-Si has momentum over TF now, so from a module perspective I would not bet on FSLR. On Chinese or not, I'm still not sure. I think technology-wise they are still behind, but are keeping pace and have compensated with big production cost improvements. Mass production in a hub makes it easier stay competitive on production costs. Of the US module makers I'm instead mainly looking at SPWR. I see them as someone that can add a lot of value from superior conversion efficiency, but the production cost gap to the Chinese group is still too high except for very high BOS cost market. I'm looking at REC too as a non-Chinese company that looks interesting.

Back to the model discussion. I often talk about the benefits of vertical integration to reduce overhead costs along the value-chain, but I do agree with you; if you have nothing to add to a segment stay out of it. Let's look at the first half of the value-chain, i.e. poly to module. The value-add differentiation opportunities are in my opinion in the wafer and cell steps. For most companies it might therefore make sense to focus on one of these two. Besides being superior on their core focus they need two more things to stabilize the business margin through the industry cycles, so that they can retain their profits:

1. Secure utilization (product sales/processing service volume and price)
2. Secure feedstock (raw material purchase/production/tolling volume and price)

Here's an idea for partnership modelling based on the sharing effort to solve the two points above and at the same time minimize inventory carrying cost. Let's have an example of one wafer focused company called SOL and one cell focused company called JASO. These two have big market-share ambitions for their core focuses, let's say they each want to keep 2 GW capacity for that. So SOL has 2 GW wafer and JASO 2 GW cell. Now to solve the two points above they have to take the risk to integrate upstream to poly and downstream to module, but since there are less technology differentiation in those two verticals they just need to be adequately efficient there (implement a proven process well). To spread the risk they share that burden with 1 GW poly and module capacity each. Here's how they would structure their business partnership.

1. SOL makes one 1 GW poly and then use that as feedstock to make 1 GW wafers. It carries poly and wafer inventory on its balance sheet.
2. JASO makes one 1 GW poly and use that to toll 1 GW wafers at SOL. JASO carries the poly and wafer inventory from this processing service on their balance sheet. SOL has now utilized its full 2 GW wafer capacity, but is only responsible for half the inventory for that production.
3. JASO makes 1 GW cells from the SOL tolled wafers. It carries poly, wafer and cell inventory on its balance sheet corresponding to the need for the cell production process and to make 1 GW modules.
4. SOL tolls 1 GW cells at JASO. SOL carries the wafer and cell inventory from this processing service on their balance sheet. JASO has now utilized its full 2 GW cell capacity, but is only responsible for half the inventory for that production.
5. SOL and JASO makes 1 GW of modules of the 1 GW of cells they each have made with shared efforts. Now they'll share the effort of offsetting these 2 GW modules to the market, since they got twice the value-add from both superior wafers and cells and only have to sell half the module volume each to sell out their full core capacity (wafer and cell respectively) they should not have to spend too much to get it done, maybe focusing on complementary markets and branding to not compete too much. Should market price for poly crash below their cash cost they'll share the idling cost.
   

Notes:

1. Capacities are annualized, while feedstock and finished goods inventory usually cover less than a quarter of production and shipment requirement.
2. The model is simplified with a 2 company example. In reality the partnerships would be more diversified.

Wouldn't this be an efficient model for the industry? Variation of it would be to have the two companies source some poly requirement from the market (to require less poly capacity) and sell some of its core product output on the market (to require less module sales).

It's possible to imagine this partnership structure extend further downstream with one company focusing on EPC and the other on project development for the plants market or one on kits and the other on installs for the rooftop market. That would reduce module sales requirement and stabilize business margin and volume further.