Contract Silicon Price Falls 50%, Close to Spot Price

Prices for silicon and the resulting wafers have fallen so fast that major solar panel makers could afford to sell their products at below $2 per watt and still "make a small profit," according to New Energy Finance on Tuesday.

The price for long-term silicon contracts has fallen about 50 percent this year from a year ago and come close to the spot market price of $67 per kilogram, or about $0.50 per watt, said the London-based research firm.

Blame the increase of silicon supply at a time when demand has dived significantly. The credit crunch has made it difficult for developers to borrow money for installing large solar energy projects in Europe and the United States, two key markets. The silicon is turned into ingots and made into wafers. Solar cells use the wafers to make their products, which are then assembled into panels that can be seen on rooftops today. 

Many solar wafer and cell makers who signed long-term contracts in 2007 and 2008 have either renegotiated or canceled their contracts. These companies inked those agreements when silicon fetched $300 per kilogram on the spot market and $150 per kilogram for long-term contracts, New Energy Finance said.

Silicon makers mostly sell their material under long-term contracts. But the spot market prices provide good indicators of the price fluctuation and market conditions, information that solar cell makers would use in contract negotiations.

Silicon manufacturing costs for major producers such as Wacker-Chemie, Hemlock and Tokuyama are estimated to be about $30 to $35 per kilogram.

The sharp pricing declines have exerted the most impact on China-based silicon producers and other newcomers, the research firm said. 

Not surprisingly, wafer makers have suffered, too. Many of their customers also have demanded to renegotiate contracts or simply canceled them all together.

The spot market price for multicrystalline silicon wafers fell to $3.44 per piece this month, or $0.93 per watt, New Energy Finance said. For contracts that require deliver in 2009, the medium price has fallen to at least $5.89 per piece.

Overall, the medium price for existing contracts has reached $5.25 per piece, and that's expected to fall as more negotiations take place.

LDK Solar, a silicon wafer maker in China, for example, expects to take a second-quarter inventory write-down of $150 million to $160 million. It also anticipates a net loss of $180 million to $200 million for the second quarter, the company said last week.

Germany-based Q-Cells, one of the world's largest solar cell maker, recently reported a 37 percent decline in second-quarter revenue (See Q-Cells: Market Still Tanks, 2Q Sales Fell 37%).

Solar project developers should be benefiting from all these price declines, which make it possible for large solar panel makers to sell their ware at below $2 per watt. That's half the panel price in 2008, New Energy Finance said. That price also would bring silicon panels much closer to the price for First Solar's cadmium-telluride panels. 

First Solar, based in Tempe, Ariz., has regularly publicized its production costs to show that it could make panels cheaper than anyone else. First Solar's production cost during the first quarter of this year was $0.93 per watt, the company said.  

But the company is facing tougher competition these days, and some analysts are expecting the company to lose its market share to silicon panel makers.  

Project developers are still largely crippled by the credit crunch. Investors said they are seeing signs of improvements, though more visible changes aren't likely to take place until 2010 (see Reality Check: How Much Impact Can the Feds Have on Solar?).