Archive for July, 2006

The silicon wafer industry

At Solar 2006, the annual meeting of the American Solar Energy Society there was much talk  of the shortage of polysilicon wafers, which are used to make the dominant type (crystalline) of solar Photovoltaic panels.  The other major use of polysilicon is for computer chips, which has been the dominant use until recently. 

I sat in on the following panels where the industry was discussed:

The CEO spotlight, where Goran Bye, the CEO of REC Silicon; as well as the “Market Status and Trends” panel, where several of the panelists discussed the polysilicon supply.  In particular, Hilary Flynn presented a paper by herself and Travis Bradford entitled “An assessment of global silicon production capacity and implications for the PV industry.”

According to Flynn and Bradford, the silicon wafer industry is highly consolidated, with the following major players: Hemlock, Wacker, REC Silicon, Tokuyama, MEMC Semiconductor, Mitsubishi, and Sumitomo having about 99% of the market in 2005.   Demand currently far exceeds supply, with more polysilicon being used in 2005 than was produced, with the excess being a drawdown of inventories, recycling, or an artefact of inaccuracies in the sampling method, or a combination of those factors.

From my own reading, there is much anecdotal evidence of the polysilicon supply shortage, with PV manufacturers scrambling to tie up contradts for supplies sufficient for their projected production, and even some failing to do so, with MEMC even reneging on an agreement with Evergreen Solar to supply them.

However, the silicon processing is extremely capital intensive, with long lead times, and all the major manufacturers are announcing large planned expansions to investment, and several new players are also entering the industry.  There is a long lead time between when a plant is announced, and when it come on line, so the silicon market is likely to remain out of balance, with extremely high prices and profits for silicon processers through both 2006 and 2007, assuming 30% growth in PV production.

It seems unlikely to me that PV manufacturers will be able to continue to make up the polysilicon shortfall in 2006 and 2007 from inventory (although no one seems to know what inventories are, except that they’re small, hence supply of PV growth will be constrained below 30%.

Hence I expect all polysilicon manufacturers to be very profitable through 2007, with prices beginning to subside (and perhaps crash) in 2008-9.  A crash of polysilicon prices would be facilitated by overbuilding of producers, combined with less than anticipated demand from PV manufacturers.  This might be aggravated if one of the other PV technologies (CIGS, CdTe, or Amorphous silicon) were to grab market share from crystaline silicon due to price breaktroughs and constraint in the supply for polysilicon.  Both CIGS and CdTe have the potential to be cost competitive with crystalline silicon (“PV value chain supply and demand challenges” Booz Allen Hamilton, presented at the conference), but will probably be constrained by the limited supply of Indium (CIGS) and Tellurium (CdTe) both of which are very rare.  As an aside, this might produce a large opportunity for investment in mining companies with large proven reserves of Tellurium or Indium– if one of these technolgies make much more rapid strides than crystalline PV.

There are two technologies in use by polysilicon manufacturers.  The most common is the Siemens process on which the majority of production facilities are based.  This process is extremely energy intensive, about 10x more so than the other technology, fluidized bed, which is currently used by MEMC and REC Silicon plans to use in it’s new capacity.  Most other manufacturers seem to be sticking with the Siemens process, most likely due to patent issues.  For this reason, my favorite silicon manufacturer is MEMC, since their less expensive process is likely to make them better able to weather a crash in the price of processed silicon in 2008 or 2009.  In the next year or two, I think most players in the industry will probably continue to benefit in terms of profits, although much of this may already be reflected in their stock prices.

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Look where few others are looking

In order to come up with investments that will out-perform the market, an analyst must do two things:

1. Have an opinion that differs from the market consensus.

2. Be correct in that opinion.

 This probably seems absolutely obvious when I put it on the page in front of you, but when it comes to investing, few people follow these tenets.  First of all, by definition, most people *can’t* have a nonconsensus opinion; if they did, then that opinion would be consensus.  It’s a catch-22.

 Also, it is simply emotionally difficult for most people to hold an option that differs from their friends and family.  As my mom once said, “Everyone likes to be validated.”

 It may be great for your social life to agree with the people around you, but it’s a lousy way to invest.  Here’s why: when most market participants think that a particular stock or sector is a good buy, then a lot of them have already bought and are waiting for it to go up.  There aren’t many people left to buy.  When the stock or sector becomes less popular, the same people will start to sell, and it will decline.

 To produce above average returns, you have to buy before everyone else has, and sell before they do.  This means buying something when it still can become more popular, and selling while most market participants are still excited about it.

 How can we do that?  By developing an understanding of consensus opinion (the popular press is great for this), and figuring out where they are wrong (which can be accomplished by paying attention to sources of information outside the popular press (when was the last time you read a cutting-edge academic paper) or by putting together lots of different pieces of information that others have yet put together.

It’s not enough to simply hold an unpopular opinion.  Unpopular and wrong can lose you a lot of money as well.  For instance, if a little birdie told me that the whole mess in Iraq would resolve itself tomorrow, I’d probably sell the stock of a bunch of defense companies.  If instead the mess over there gets worse (which is pretty close to consensus opinion in my circles,) and the Pentagon puts in more orders for munitions, all those stocks I just sold would go up, and the person who sold those stocks expecting a spontaneous outbreak of peace wouldn’t be a very happy investor.

 When considering investing in the Energy sector, the first question to ask is, is the market over- or underestimating future energy prices?  If you think the market (by which I mean the consensus of opinion of market participants) is overestimating, then you should sell or stay out, if you think the market is underestimating, then it’s time to increase your energy allocation.

What do I think?  In the long term (a decade or two) I’d say the market is underestimating, but in the short term, it’s probably overestimating.  Conclusion: it’s probably best to wait for a pullback before allocating a serious amount of money into the energy sector, but it’s probably worth slowly dribbling a little money in, which I like to do using Cash Secured Puts , while I wait for a pullback in energy stocks.

Renewable energy has been getting a lot of press recently, so this also makes me shy away from stocks that are obviously in the sector… if the company has “Solar” or “Ethanol” or “Wind” in its name, I think it’s time to stay away, even after the recent small pullback.   I prefer the suppliers to the renewable energy companies, and companies involved in energy efficiency (which not only has better economics than most renewables, but fewer people are excited about it. A search on Google News just turned up 4370 articles that mentioned “renewable energy” without mentioning “energy efficiency”, while there were only 2340 that mentioned “energy efficiency” without mentioning “renewable energy.”  Even renewable energy advocates say (occasionally as an afterthought) that you should consider energy efficiency measures before investing in renewable energy, so the fact the renewables are so much more popular is a sign that the consensus is confused: hence it makes more sense to invest in Energy Efficiency companies now, than it does to invest in renewables.

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I’m in the business of giving investment advice for a fee.   You will probably come across a lot of information here that could be taken as company recommendations, investment advice, etc., and no doubt some readers will act on what they read here.  Here are a few things you should know before investing:

 1) Past performance is no guarantee of future results.  Neither I nor anyone else knows the future.  Any investment can go up or down, and there is no strategy which gives protection against losses in adverse markets. 

2) Anything I write only reflects my knowledge or opinions at the time of writing.  I have no intention of going back and updating past posts to reflect new information or changes in the how I’m thinking.  People who want up-to-date advice should contact me about becoming clients.

 3) I am an investor, as well as an investment advisor.  I and my family will often will have investments in the same stocks I’m writing about.  My clients will also have positions in these stocks.  If I decide it is time to buy or sell a stock, I first place orders in client accounts (for which the trade would be appropriate) and inform clients of the change.  I will next place orders in my accounts and those of my family members.  Only after all this happens will I publish the new recommendation to the blog.  You get what you pay for, when it comes to investment advice.

4) Appropriateness.   Most people should not be investing in alternative energy stocks.   Most of these companies have never been profitable, nor is there any guarantee that they will be profitable ever.  Anyone investing in alternative energy stocks should be prepared to lose everything invested.  If you are investing solely on the basis of articles in a free blog like this one, you seriously need to have your head examined.  Don’t do it!

 Any investment should be considered in terms of your entire financial picture.  If you don’t feel capable of doing this, you need to learn how, first.  I plan to include a lot of posts that will help you become a more sophistocated investor, but there are a lot more efficient ways to learn about investing than in these posts.  See my website for some good places to start. 

If, on the other hand, you just want to know more about the trends in alternative energy, and are not planning on gambling your hard earned cash based on my out of date thoughts, welcome!

5) Most people aren’t ready to invest in the stock market, let alone alternative energy.  Investing in the stock market is like sitting down at a poker table with a bunch of chain smokers wearing visors.  If you don’t know who the sucker is, you’re it. 

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The purpose of this blog

I’m starting this blog as a record of my thoughts on investing in renewable energy and energy efficiency.  I plan to include comments on the industry, links to articles I’m reading, and whatever else comes to mind.

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