When considering solar stocks, the conversation always turns to the cost of silicon and solar wafers, the raw materials that go into solar cells and photovoltaic solar panels.
For some time now, the industry has suffered a shortage in silicon. This has driven up prices and led to PV panel manufacturers implementing long-term contracts to assure adequate supply in the future.
Many have thought that with new silicon suppliers coming online the shortage would soon ease and prices would begin to come down.
An article today in Digitimes suggests that the price optimists are a little ahead of themselves. To quote the article:
"Solar silicon wafer suppliers Sino-American Silicon Products (SAS) and Green Energy Technology are considering raising their contract manufacturing quotes soon because of rising production costs..."
What is driving the rise in prices? The increased prices "reflect the rising costs of materials - such as steel wire -and electricity which has been driven up by the hikes in oil prices."
The article goes on to say that prices will increase 5%-10% and further suggests that the silicon shortage is still with us.
This might be a time to reevaluate LDK Solar (LDK). As many solar investors know, LDK has been building a polysilicon plant. It is intended to provide an in-house source of wafers as well as a revenue stream based on selling directly to solar end-product manufacturers. There has been spirited debate as to whether this strategy made sense given the significant investment required to bring the plant online and the risk that silicon prices might crash just as the plant began to ramp up production.
In a recent statement released on July 2, LDK Chairman Xiaofeng Peng said the company expected to produce between 100 and 350 tons of polysilicon this year.
So it looks like silicon prices will remain stable and may even move somewhat higher this year. LDK's gamble on building a polysilicon wafer capability seems to be on the verge of paying off. Investors should be able to expect an increase in revenue and fatter margins as the plant begins to produce meaningful quantities of silicon. As for increased costs, LDK Solar has secured a subsidized capped electric rate from the local government for wafer production and polysilicon production.
Analyst consensus is that LDK earnings will be flat for the next couple of quarters at $0.42, slightly less than the previous two quarters. Given a favorable pricing environment and the new plant coming on line, LDK could surprise to the upside. With the stock now down to $32.38, LDK is worth a look.
Disclosure: author is long LDK
Sources: Digitimes: Solar wafer suppliers Green Energy and SAS may raise quotes
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