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Financial Times: Energy cell producers need more silicon for brighter future

By Andrew Wallmeyer in Frankfurt
Published: February 24 2006 02:00 | Last updated: February 24 2006 02:00
Skies have been sunny this year for solar energy companies, because share prices have soared on strong earnings and news of government-backed renewable energy initiatives.
An index of solar stocks compiled by Photon Magazine, which covers the photovoltaic [devices that turn sunlight into electricity] industry, has risen 37 per cent since January 1, and is up 160 per cent during the past year. SolarWorld, of Germany, has climbed 164 per cent in the past 12 months.
Despite the boom, many analysts say it is not too late for investors to profit. They say that the factors fuelling the sector's growth will continue well into the future. They point out that the additional cost of solar power, compared with conventional energy sources, is falling. Until prices converge, government initiatives will sustain the industry.
“In the short-term, you could see share prices drop but in the mid and long-term I am quite convinced that this kind of technology offers further significant upside potential,” says Erkan Aycicek, who follows the solar industry for Commerzbank. Germany, where the environmental lobby has long been strong, has a concentration of solar power companies. Elsewhere, solar manufacturers are often part of larger industrial conglomerates.
The biggest challenge is to overcome a scarcity of silicon, which is used in photovoltaic cells. Silicon producers intend to increase output but experts anticipate that it will take at least two years for their plans to translate into higher production.
Until then, solar companies will have to compete with the semiconductor industry, which uses more silicon and is willing to pay more for it.
“Of the listed companies, SolarWorld is clearly in the best shape because it has ongoing long-term supply contracts with two of the major silicon producers, Wacker and Hemlock, and it also is going to be building its own capacity,” says Michael McNamara, an analyst at Jefferies, a New York-based investment bank. Q-Cells also has several long-term supply contracts that “put it in fairly good stead,” Mr McNamara says.
Mr Aycicek considers Conergy, another German firm, as one of the sector's best investment opportunities because uncertainties over its silicon supply have kept it trading at a significant discount to SolarWorld and Q-Cells. “We believe it is only a matter of time before the capital market's reservations about Conergy disappear,” he wrote.
The silicon shortage is forcing consolidation. Analysts say a failure to lock up long-term supply was one reason Shell Group sold its silicon-based photovoltaic manufacturing operations to SolarWorld this month, and they believe more consolidation is on the way.
The companies that emerge can look forward to a market expected to grow from $6.5bn in 2004 to $18.5bn in 2010, according to Solarbuzz, a research and consulting firm.
That growth will largely be driven by increased government incentives to encourage the development and use of renewable energy. In the US, for example, Californian regulators last month pledged $2.9bn in tax breaks for solar energy during the next 11 years.
European solar demand is being driven by a number of so-called feed-in tariffs that set above-market rates for renewable energy and force power companies to purchase what is produced.
Five years after passing its landmark feed-in law, Germany has supplanted Japan as the world's largest solar energy producer, with 39 per cent of global capacity, according to Solarbuzz. Germany still installs more solar cells each year than any other country but demand is expected to shift to sunny Spain, which last year approved a renewable energy law largely modelled on Germany's.
Some analysts see clouds on the horizon. Alastair Bishop, of Dresdner Kleinwort Wasserstein, says the industry's high margins and valuations have led him to take a “more cautious” view of the sector. The silicon shortage has limited solar cell production but with demand continuing to grow, solar manufacturers have been able to raise profit margins. When silicon is more readily available and cell production increases, he believes margins might come down again.

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