LDK Solar is a Chinese company that sells multicrystalline polysilicon wafers to solar panel manufacturers. With margins over the last year consistently above 30%, it's clear that LDK's strategy of using cheaper, recycled polysilicon to produce its wafers in a low-wage, Chinese environment is paying off by keeping costs down without affecting wafer quality. 63% of LDK's revenues come from Asia, with almost half that coming from China, while another 27% comes from Europe.. The rest comes from North America, a still-emerging market for renewable energy technologies, and a region with high future growth potential.
Demand for LDK's wafers is greatly affected by demand for solar panels. Rising oil and gas prices, fears of climate change, and political support for alternative energy sources are all playing a part in helping the budding solar market develop. Countering these forces, however, is a shortage of refined polysilicon, which is the principal input needed to produce multicrystalline wafers and solar panels. This shortage has driven up prices for all three, making solar energy less appealing than other power sources. LDK's main competitors in the multicrystalline silicon wafer market are Renewable Energy Corporation, SolarWorld AG, PV Crystalox, Kyocera, and Sumco Corporation.
LDK sells multicrystalline silicon wafers used primarily in the production of photovoltaic solar power cells. It also offers production services to other wafer manufactures. Multicrystalline silicon wafers are refined from multicrystalline ingots and blocks; LDK buys polysilicon feedstocks from silicon producers and refiners like MEMC, turns them into multicrystalline blocks, and either sells them to other wafer manufacturers or produces its own wafers to sell to solar panel producers.
LDK is greatly affected by the silicon industry. The silicon industry is essentially a commodities industry: one company's silicon can only be differentiated from anothers' by price.
The multicrystalline wafer industry works similarly. As long as a wafer is pure enough to work effectively, customers will purchase based on price, making the industry subject to low profit margins. LDK remedies this by producing in China (taking advantage of low labor costs) and by using scrap and recycled polysilicon (taking advantage of low-priced inputs) to keep costs down and bring margins up.
Fixed price contracts are good for the company if silicon wafer prices fall in coming years, as they allow the company to make more money than it would without the contract. If price levels rise, however, the company could miss out on potential revenues.
In 2009, LDK incurred a net loss of $234.0 million on revenues of $1.10 billion. This represents a turnaround from 2008, when the company earned $66.4 million on $1.64 billion in revenue.
Solar power is a rapidly emerging form of energy production that converts light (usually from the sun) into electricity through the use of photovoltaic (PV) cells. PV cells are typically made from multicrystalline wafers; in fact, they are the only major source of demand for multicrystalline wafers. Thus, demand changes in the solar industry are equivalent to demand changes for LDK's business.
Silicon, a necessary input to most solar panels (and to the multicrystalline wafers that LDK produces), is one of the most abundant elements on Earth, but has nonetheless experienced rising prices over the last few years. As solar power started to popularize, silicon producers, who previously catered only to the semiconductor market, experienced a surge in demand - a surge they couldn't keep up with, given the limited amount of mining and processing capital on hand. This created a "shortage" of refined polysilicon, and caused prices to soar. For multicrystalline vendors like LDK, higher silicon prices mean higher costs and lower margins. Furthermore, a short-run spike in silicon prices would lead to a spike in solar panel prices, causing solar energy to be less competitive when price-compared to other sources of energy. LDK remedies the high-price problem by using recycled and scrap polysilicon as an input; with virgin silicon priced from $150-200 per kilogram and scrap priced from $50-$80 per kilogram, the savings from such a strategy are considerable. LDK believes that it can produce multicrystalline wafers of premium quality despite the use of non-virgin polysilicon; given the number of recent supply deals with major solar manufacturers, its quite possible the company can.
Prices will not rise forever, however, as high silicon prices create incentive for more companies to enter the silicon wafer market; eventually, demand will be met. Even better, there are delays in prices changes, which could cause companies to continue to enter the silicon wafer market, thereby creating an oversupply and causing prices to drop (hence, the cyclical nature of commodity prices). Once prices drop, demand for solar cells could increase, as would margins for multicrystalline wafer companies.
Governments worldwide have implemented legislation to encourage alternative energy production, due to political pressure from public concerns about climate change and energy independence. Examples include:
Emissions caps and clean energy mandates that are supported by subsidies and tax cuts make solar energy relatively cheaper. This means that corporations and utilities companies may turn to clean energy sources to generate electricity for manufacturing facilities and power plants, directly benefiting solar power producers and input suppliers like LDK. Without government support, however, solar companies would have difficulty vending their products, as solar energy is currently much less cost effective than coal or natural gas.
Oil and coal power are the two main energy sources for most of the world and release massive amounts of pollutants that contribute to adverse environmental effects such as acid raid. With a rising worldwide demand for energy, demand for clean forms of energy have risen. Solar energy is fairly clean, as photovoltaic panels release no pollutants or emissions (except in production). Clean energies like solar energy have experienced increasing demand , especially in politically progressive regions like Europe.
The multicrystalline industry includes the following key players: