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Due to these market conditions, the analysts say the silicon market will be particularly affected. "Weak demand at the module level combined with excess supply implies that it is only a matter of time before companies refuse to take further deliveries of silicon," said the company note. They say this is already happening, with Woongjin Energy, for example, canceling its supply contract with OCI.
They add, "We also note Wacker client SolarWorld announced last week that it would be building its own silicon plant in Qatar. Whether or not SolarWorld will actually build this plant is open to question.
"It may be that they are attempting to put pressure on Wacker to reduce prices or even a marketing ploy to enter the UAE market. Regardless it is clear that with solar manufacturers suffering severe margin pressure, the pressure will increase on silicon producers to reduce long-term contract prices."
Pricing strategies
With regards to Germany-based Wacker, because the majority of its earnings are coming from solar, the Jefferies analysts say it will have to renegotiate its pricing with its Tier 1 clients, like Bosch, Yingli and SolarWorld. Competition from new silicon entrants like OCI and GCL Poly will also create price pressure.
From Jefferies' perspective, average silicon spot prices are said to currently be USD$45/kg, having dropped from a high of $75/kg at the start of this year. The analysts believe this will further drop to $35 in the first half of next year.
"We are of the opinion that prices will stay sticky around $35 for Wacker as we believe that below this level many high cost players will just not produce," they explain. "That said, if players like GCL Poly decide to capture market share at the expense of profitability prices could fall further, which will impact Wackers margins."
They add that a drop in silicon pricing from $50 to $35 would save between eight and nine U.S. cents per watt for the solar companies.
"At first glance Wacker may seem somewhat sheltered from these price falls as it is sold out until 2015 with upfront payments of up to 20 percent of a contract value," say the analysts. "However, we caution, that at $35/KG it will cost Wacker customers to break their contracts despite the fact that Wacker polysilicon is of a higher quality than many of its competitors. This in turn enables the production of more efficient cells while at the same time reducing yield loss."
Due to these predictions, Jefferies has reduced its financial estimates across all of Wackers businesses for both this year and next. As such, they expect the manufacture to reap revenues of 5.14 billion (previous guidance: 5.22 billion) and EBITDA of 1.22 billion (previous guidance: 1.31 billion). In terms of 2012, Jefferies expects Wacker to earn revenues of 5.01 billion as opposed to the previously expected 5.7 billion and EBITDA of 956.2 million, as opposed to 1.45 billion.
Nosedive
In line with Jefferies, at last weeks PV Taiwan, Motech CEO, P.H. Chang stated that the fourth quarter of this year will see polysilicon prices nosedive. He said that worldwide polysilicon supply is likely to exceed sluggish demand in the fourth quarter and that prices could be anywhere below $25 to $40/kg.
Meanwhile, spot prices may decline to under $35/kg by year end. It will be a "troubling time" for polysilicon makers, he said. Robin Chien, vice president of TSEC Corporation added that the first quarter of 2012 will be particularly challenging for polysilicon, with prices falling to between USD$20 to $USD35 per kilogram.
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