REC Struggles to Make Its Solar Business Shine

REC of Norway is a vertically integrated solar company that produces solar grade polysilicon, wafers, solar cells and modules, and semiconductor-grade polysilicon and wafers.

REC is a major polysilicon and wafer producer, ranked among the Top-5 in both categories for metric tons and megawatts produced. One unique factor about REC is that it has Intellectual Property (IP) in Fluidized-Bed Reactor (FBR)-type silicon and is expected to have a production-level plant ready by the end of the year. This technology promises continuous flow production, a capability lacking in the incumbent Siemens-type technology that most of its competition uses.

Being fully integrated at this level has benefits and drawbacks in the solar industry. In theory, this structure allows for great cost reduction as margin stacks of individual players can be collapsed into one company. In reality, each node of this integrated value chain must be efficient at what it does in order to create a synergy among the segments and to capitalize on the increased margins. To be efficient, a company must first be profitable in each segment of operations. Furthermore, it must produce enough volume at each node to a scale where the cost per watt can be competitive.

Problems Begin
Being a major polysilicon player, REC enjoyed a huge windfall as a bottleneck caused polysilicon prices to skyrocket throughout 2006 and 2007. However, this success attracted competition from big players like LDK and DC Chemical, which decided to jump into the polysilicon game.

Beginning in the third quarter of 2008, the solar industry experienced its first oversupply problem where demand became the major concern, rather than supply. This demand slowdown, combined with newly built capacity from new and existing industry players, created a perfect storm for the entire industry throughout the rest of 2008 and continuing through 2009.

Riding the Revenue Wave
A key factor to riding out this storm is being able to generate revenues - one of REC’s key strengths. With many customers lined up for both semiconductor- and solar-grade materials, REC will be able to emerge from the carnage in a better position than many of its competitors as long-term contracts exist through 2016. REC’s semiconductor customers include LG Electronics and SUMCO, while its solar customers include Suntech, Gintech, BP Solar, Sharp and many others.

However, growth will be dampened as REC is struggling to make its solar division truly efficient. Based on company financial statements, this division is a drag on earnings with negative operating margins as of the first quarter of 2009.

So far in 2009, the division has announced cutbacks of 50 percent in megawatt production throughout the first half of the year. REC will need to refocus its efforts on making this business profitable by the end of the year to truly take advantage of its world-class polysilicon and wafer divisions.