HOKU also signed a similar deal back in January with Sanyo Electric Co. worth $370 million over seven years.  The contract with Sanyo also included an initial deposit of $2 million.  During the Sanyo deal in January the stock doubled overnight similar to what happened yesterday in after-hours. 

The Polysilicon plant is still in the process of being constructed in Pocatello, Idaho.   The plant when completed will be capable of producing 2,000 metric tons of polysilicon per year.  Hoku also intends to seek debt capital of approximately $150 million for the financing and construction of the plant.  With the market cap of only 75.91M (before the Suntech deal was announced) the stock has lots of room to grow long term.  However, this is only possible if they are successful in building the Polysilicion plant in Idaho.  The fact that we have two big names in the solar industry (Sanyo and Suntech) backing them up is a positive sign for such a small company. 

The stock price will experience huge swings both up and down until at least the company becomes profitable and finishes the polysilicon plant in 2009.  Also according to a lot sources the Polysilicon shortage will end at the latest by 2009 so the margins won’t be as fat as they are now.  I would wait for the stock to settle back down before going in long term.  If you are momentum trader then you can probably give it a shot at these levels. 

* No positions in HOKU or STP.

• Credit Suisse analyst Satya Kumar, “We see so much new poly coming online that it is now becoming a question of when, not if poly will go into oversupply; and our analysis suggests that first quarter 2008 could be when supply growth inflects high enough to overcome demand,”
• MEMC Electronics: Demand from the solar market, however, continues to be healthy.
• Sunpower Corp., “our partners M.Setek and DC Chemical have made steady progress with their new polysilicon manufacturing facilities”.
• Sunpower Earnings call transcript via SeekingAlpha:

• Two new entrants in the Polysilicon arena: M. Setek is integrating upstream to begin polysilicon production and their polysilicon plant is on schedule to deliver silicon based on this new capacity in Q3 of 2007. The other new entrant is DCC, the leading Korean chemical company and they are on schedule, as well, to begin delivery of polysilicon to us in Q1 of 2008.
• We expect pricing to be up relative to 2006 approximately 10%.
• In 2008 we would expect silicon prices to go down.

Click here to see how polysilicon affects solar stocks and to learn about Polysilicon

* I am short WFR and FSLR

Several producers have reported greater than 10% declines in feedstock prices – both at the wafer and silicon level – in the past six months. Additionally many Chinese producers have optimistic outlooks on the silicon supply moving forward with the bottleneck relaxing significantly by late 2007 vs. previously anticipated 2008.

However, the firm also added that any softening of the situation is perceived more favorably in China than it actually is for the market more broadly.

There is also some news from the Polysilicon and Solar industry conference in Munich. Hemlock and M.Setek, Polysilicon producers, announced they were increasing capacity. However, Piper Jaffray analyst Jesse Pichel also noted that competitors’ capacity plans may not come to fruition as quickly as they hope.

Once again we are uncertain about when the supply of polysilicon will start easing up. This is what prompted me to write this article about Polysilicon shortage a few weeks ago. MEMC electronics (NYSE: WFR) got hit today on this news but recovered pretty strongly by the end of the day.

I am still betting that shortage eases up by end of this year or 2008 rather than 2010. My reasoning behind shorting FSLR and WFR has a lot to do with the supply of polysilicon. First Solar Inc. (Nasdaq: FSLR) is overpriced regardless in my opinion. I am also long Suntech Power (NYSE: STP)

What is Polysilicon?

Polycrystalline silicon or polysilicon or poly-Si or simply poly (in context) is a material consisting of multiple small silicon crystals (wikipedia). Polysilicon is a key component of solar cells and the recent shortage has caused the prices to soar.

There are two scenarios here:

If the polysilicon shortage continues to last beyond next year and continues for a few year then it benefits:

• MEMC Electronics (NYSE: WFR) – Polysilicon supplier
• First Solar Inc. (Nasdaq: FSLR) – Thin film solar cell manufacturer
• Evergreen Solar (Nasdaq: ESLR) – Uses string ribbon technology that uses less polysilicon.
• Daystar Technologies (Nasdaq: DSTI) – Thin film solar cell manufacturer

If we see more supply and prices stabilizing or declining starting next year then it benefits:

• Suntech Power (NYSE: STP)
• Sunpower Corp. (Nasdaq: SPWR)
• Trina Solar (NYSE: TSL)
• Canadian Solar (Nasdaq: CSIQ)
• Solarfun (Nasdaq: SOLF)

Let’s look at what the solar cell makers have to say:

Suntech Power:

We do believe in the next year or two there will be about five or more polysilicon manufacturers in China, and as I always say manufacturing polysilicon is not a rocket science. There could be some teething problems in the beginning, but we do believe polysilicon will be manufactured in China very soon in large quantities. (CEO Zhengrong Shi via SeekingAlpha)

Sunpower:

• We expect polysilicon prices increase further in 2007.
• We expect that polysilicon demand will continue to outstrip supply throughout 2007 and potentially for a longer period.

Other Sources:

• According research firm The Information Network, the amount of polysilicon shortfall is likely to triple to 71,000 metric tones (MT) during 2006 to 2010. (Digitimes)
• Polysilicon supply will remain tight until 2008, according to research by JP Morgan in a September 2006 research report. The equity firm attributed the cautious expansion to the vast investment involved and the experience of vicious oversupply in 1998. JP Morgan further noted that most polysilicon vendors require stringent long term contracts with favorable pricing agreements before they start building new capacity under the mentioned considerations. (Digitimes)
• Hemlock Semiconductor, the largest polysilicon maker, is spending nearly $500 million to double its output from 7,700 to 14,500 metric tons annually by 2008. Germany’s Wacker-Chemie is boosting production from 5,500 to 9,000 tons. MEMC Electronic Materials, which makes polysilicon and silicon wafers, plans to double production from 4,000 to 8,000 tons. (EDN)
• Several leading solar energy companies projected that the global shortage in silicon, will ease by 2008 as production capacity expands. The forecast was made by Elkem Solar, a leading polysilicon supplier, and BP, one of the largest producers of photovoltaic (PV) cells, at the second annual “China’s Power and Alternative Energy Summit 2006” on June 8 and 9, 2006. (WorldWatch)

Well, I still don’t know if the shortage will end next year or continue until 2010 and beyond. Right now I am betting that we start seeing some relief in supplies starting next year. Chinese polysilicon suppliers should help with the supply constraints as well and my guess is that we will see Suntech Power, the largest of the Chinese solar cell manufacturers, to vertically integrate by adding polysilicon production.

Right now my holdings reflect that I believe polysilicon shortage will ease in 2008.

I own CALL options of STP and SPWR and PUT options of WFR and FSLR