LDK Solar (NYSE:LDK), one of the most important polysilicon producers in China, could benefit from the rise in raw material prices as Chinese producers have started to scale back production. China produces around 45% of the world’s polysilicon, which is used in the production of solar modules and other electronics products. Almost a third of the capacity in the country is presently idle because of low spot prices.  Spot prices of polysilicon dropped to their lowest levels in the decade because of a shakeout in the polysilicon industry. The idle capacity can come online only if the prices recover by over 60% from their present levels. Module manufacturers like Suntech Power (NYSE:STP) use polysilicon ignots to produce solar modules.
We have a $4.50 price estimate for LDK Solar, which is at a 20% premium to its current market price.
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The polysilicon production is greatly influenced by the fortunes of the solar power market. About 90% of the global polysilicon production is used in the production of solar modules. (See: LDK Solar Gets Caught in Polysilicon Glut) A sharp cut in solar subsidies in dominant European markets sent the demand for modules downward, which reflected in a sharp drop in polysilicon spot pricing. Prices fell to $26.31/kilogram, which is at the lowest level in 10 years.  Polysilicon prices were as high as $475/kilogram in 2008, prompting capacity additions that led to oversupply. Due to lower prices, many small players suspended production which resulted in prices rising by around 9% since mid December. Spot prices are currently at around $29/kilogram.
Analysts say that almost 30% of Chinese polysilicon production capacity has halted because of low prices.  However, with prices already on the rise and the industry executives pinning hopes on local demand for modules to show robust growth, polysilicon prices could rebound to around $40 to $50 per kilogram. Most of the idle capacity can come on line if prices exceed $47/HG, according to observers.
LDK continues to operate its plant, placing hopes on Chinese installations to boost demand. The company earlier revealed plans to triple its polysilicon production by 2014 to 55,000 tonnes per year. Global annual production is set to rise to 500,000 tonnes by 2014, according to estimates, exacerbating oversupply in the industry.Notes:
- China Solar Silicon Production Curbed 30% to Lift Prices: Energy, Bloomberg [↩] [↩] [↩]