Trina Solar (NYSE: TSL) shares rose 15.7 percent Monday after the company said it has canceled plans to build a 10,000-ton silicon factory.
The company in December announced it was building the $1 billion plant, which it had planned to finish in 2012. That was after Trina saw its margins squeezed by the shortage ofsolar-grade silicon last year and after the company in October hired a vice president for polysilicon to help confront its problem (see Silicon Steals the Spotlight, Again, Could China Steal the Solar Throne? and Has Trina Solar Found its Man?).
The company last month also announced an agreement to buy $49 million worth of equipment for its project to make silicon, also known as polysilicon. The agreement will lapse as a result of Monday’s news, according to Trina.
Trina made the decision to end the plant’s development after "careful assessment of our raw-material requirements, in conjunction with recent and favorable long-term polysilicon market and supply condition developments," CEO Jifan Gao said in a written statement.
Shares rose $5.95 per share to close at $43.95 per share Monday.
But Rick Hanna, an equity analyst at Morningstar, said it’s "a little premature" to say that it’s over.
"There’s a massive race to add more capacity because [the industry] is still capacity-constrained in the short-term, although so much capacity coming on board should eliminate some of the supply constraint that we’ve had -- if not this year, than certainly in 2009 or 2010," he said.
Many companies are still adding as much capacity as they can in an attempt to grow large quickly, he said.
"We’re really in a land grab right now, building up capacity in anticipation of demand," he said. "There could be a lot of companies sitting on a lot of capacity, and the question becomes how stable is the demand. There’s a race to become a major player in the solar industry."
Still, he called Trina’s decision "a breath of fresh air" amid a series of silicon-expansion announcements.
Hanna said he’d been concerned that Trina would have to raise capital to produce silicon, in addition to expand its production of solar cells, which would end up diluting the stock.
"It seemed the capital expenditure was more than it should be," he said. "I think as they focused, they said, ’Let’s look into panels and do that really well, and not go into [silicon] ourselves,’ and they obviously got a good response from shareholders. I still think they are going to have to access the capital markets as they expand, but the capital requirements just got lower."
Paula Mints, solar power analyst at Navigant Consulting, also suggested that the decision was related to the cost of building the factory.
"It might be, and this is pure speculation, that with all the silicon from Wacker, REC, etc., coming online, Trina felt that they might end up spending a lot of money to manufacture something that they would then have to sell at a low price," she said. "Looking at it this way, it is not a bad decision."
Trina’s announcement might not be the only such decision, either, Hanna said. While the silicon shortage has meant that companies have been able to sell as much solar equipment as they can produce, companies are trying to forecast future demand to avoid expanding beyond it -- and that’s difficult, he said.
Companies are facing a "very real-time" decision of whether to produce their own silicon, if they don’t have as much as they’d like, and some might well wait to see if they have enough preorders to justify the production before going forward, he said.
"A lot of people have announced capacity expansion and it’ll be interesting to see if companies will do as Trina did -- announce the expansion and get the money, but wait and see if they see demand increase and, if not, maybe pull back," he said. "It’s hard to know how individual companies are going to react to that."
It’s clear that many Chinese silicon plants are facing challenges that have put them well behind schedule, said Jed Dorsheimer, an analyst at Canaccord Adams who recently returned from a trip to China.
"Manufacturing polysilicon is not as easy as a lot of manufacturers think," he said.
Earlier this month, Mints also said that silicon manufacturing is complex and expensive to start up.
Still, Mints said she would have to see "a lot of plants canceled to start changing my view of silicon availability."
Mints previously has said that she expects the silicon supply to ease next year (see Silicon Still a Hit Topic at Photon).