Solar Systems Maker Gets Boost From Falling Raw Material Prices

Buyers of raw materials always face the choice between locking in long-term prices in contracts or simply buying on the spot market. In the solar energy business, where polysilicon is the most important raw material, it's been a good time to be a spot buyer.

Solar systems makers compete with chip producers for polysilicon. In recent years, the solar manufacturers have gotten the short end of the stick as chipmakers have gobbled up supply to stuff into cell phones, BlackBerries and other hot consumer items.

But with the chip industry slumping through the recent recession, polysilicon has suddenly been abundant. This has been a boon to Canadian Solar (NasdaqGM:CSIQ - News) and other solar module producers that buy silicon at spot prices.

Spot poly prices have tumbled from as high as $400 a kilogram to about $50, reports Shawn Qu, chief executive of Canadian Solar. "Polysilicon is one of our most important feedstocks," Qu said. "When it was $400, polysilicon costs were about 80% of a solar panel. Today -- at $50 -- it only accounts for probably 25% of total costs."

Chinese Manufacturing

Canadian Solar is Canadian mostly in name only. Its headquarters are in Ontario, but manufacturing to this point has been centered in China.

Like other Chinese solar module producers, it generally buys silicon at spot prices. So with raw material costs tumbling, Canadian Solar and its Chinese peers were prime beneficiaries of the savings. "The Chinese were buying polysilicon more on the spot market. They were able to lower their prices and win tremendous market share," said Jesse Pichel, an analyst at Piper Jaffray, which has performed banking services for Canadian Solar.

Canadian Solar's market-share gains have come across the board. "We're expanding market share in traditional markets. In the meantime, we're doing very well in emerging markets," Qu said.

Germany is the leading market for solar energy, and for Canadian Solar as well, driven largely by government subsidies. Qu cites strong performance there, as well as other traditional solar hot spots like Italy and Spain.

But Canadian Solar is also seeing encouraging results in two emerging markets: the Czech Republic and South Korea. Qu termed the Czech Republic "one of the bright spots this year." From zero sales there in 2008, Qu now claims "over 40%" market share.

Overall, Qu is excited about Canadian Solar's prospects in markets that have just begun to adopt the technology. "We are increasing our market share faster than our competitors in emerging markets," he said.

The gains are reflected in strong third-quarter numbers, reported in November. Though revenue at $213.1 million was down from a year earlier, it was up sharply, by 87%, from the previous quarter.

With prices coming down to reflect lower raw material costs, and in pursuit of market-share gains, the improvement is even more dramatic in terms of megawatts shipped. In the third quarter, Canadian Solar shipped 102.6 megawatts of solar modules, more than twice as much as in the second quarter.

Boosted by favorable currency trends, Canadian Solar reported record net income of just over $25 million and EPS of 69 cents. That's up from 49 cents in the second quarter. In the first quarter, the company had a loss of 13 cents.

Best of all, CEO Qu predicts strong growth ahead. Canadian Solar expects to ship 295 to 305 megawatts' worth of solar modules this year. But next year, Qu says, it expects to more than double shipments to 600 to 700 megawatts.

Since solar prices keep coming down, that doesn't likely translate into a doubling of revenue. "We expect to bring down prices continuously," Qu said. Still, he forecasts "significant growth in revenue."

One concern for solar producers has been the prospect of reduced subsidies in Germany, the single largest solar market. Qu says he actually favors such cutbacks. "I do support a gradual and well-thought-out subsidy reduction," he told IBD. But he still expects strong growth in Germany. "I believe our sales in Germany will grow significantly next year, more than 20%," he said.

Like many solar enthusiasts, Qu contends that the technology is growing ever more competitive, even without subsidies. Solar generation will be competitive by next year with daytime electric rates in California, Italy and Hawaii, Pichel says. But in less-sunny areas, the technology can still be significantly more expensive than electricity generated from such sources as coal and natural gas.

The value of subsidies figured into a recent decision by Canadian Solar to build a small new plant in Canada. Canadian Solar currently has 820 megawatts of solar module capacity in China, according to Qu.

Smaller Plant

The new Canadian plant would add just 200 megawatts, but give Canadian Solar a production presence closer to headquarters. In a Dec. 3 research note, Canaccord Adams analyst Jonathan Dorsheimer endorsed the move as "modestly positive." Canadian Solar will be able to diversify beyond its European sales base and improve logistics for sales to the U.S.

CEO Qu explained the decision: "As a Canadian company, it is our social responsibility to support the economy in Canada," he said.

But he also notes the lure of the strong new subsidies offered by the province of Ontario. Also attractive is the prospect of better access to the potentially huge but still lagging U.S. market. U.S. solar installations still account for less than 10% of the global market. Qu sees "strong potential" for growth in the U.S. market.

Many solar outfits made costly mistakes in either building their own wafer production or in locking in silicon supplies with long contracts when prices were high.

But Canadian Solar retained its flexibility and has reaped the benefits with low-cost supplies and a strong balance sheet. "They have a very smart management that hasn't done stupid things," Pichel said.

Information From:http://news.yahoo.com/s/ibd/20091230/bs_ibd_ibd/20091230newamer