REC: forget the Q4 financials - dive into the details


Sometimes relying on financial results to paint a picture of the status of a company is more than adequate but this has rarely applied to Renewable Energy Corporation (REC). Though many Chinese PV manufacturers have gone down the fully-integrated business model, it was REC that was the first and it does it with a truly international manufacturing footprint. However, it has been a difficult path to tread and many ups and downs along the way. Feisty, determined, unlucky but pragmatic are words that come to mind when characterizing the last five years or so of its activities, events and business development. Colourful is a nice way to sum it up.

REC’s fourth quarter results last week were no less colourful. In fact the hardest part was coming up with a headline that summed up the key developments, something normally easy to do for most companies within the PV industry.

Having failed to actually do that, I thought it best give a sample of the possible headlines I could have used, which should give you a good idea of some of the topics under discussion in this blog.

• Sharp price declines hit revenue and margins at REC
• REC ends long-term contracts switching to spot market to boost earnings
• Future of REC’s wafer manufacturing in Norway in doubt
• REC: Cost reductions to help margins in 2H12
• Quasi-Mono wafer switch to boost cell efficiencies at REC
• REC prepping 18% average efficiency cells in low cost modules
• REC Solar targets 30% cost reductions in 2012
• REC’s FBR-based silicon to reach electronic grade
• REC getting payback for Singapore fab investment

Plummeting polysilicon prices

REC's management provided further confirmation of the significant pricing pressures the industry is experiencing across the value chain. Though polysilicon production remains profitable, ASPs dropped 42% in the fourth quarter, compared to the previous quarter. Polysilicon spot prices were shown to have fallen 59% in 2011, but significantly, 40% of the total decline occurred in the fourth quarter. Revenue from polysilicon sales made up 25% of sales volume in the quarter, yet the company increased external polysilicon sales from the third quarter by 70%.

Selling significant quantities of poly in the spot market is a new strategy for REC and one that management said would continue as it generates sales and profits, especially for its FBR poly which is continuing to be ramped and could be expanded further should market demand recover. REC is targeting important cost reduction goals for silane and FBR poly in 2012, with the aim of achieving cash cost of US$13/kg for poly by the fourth quarter of 2012.

REC noted that its FBR poly cost in the fourth quarter was US$26/kg, a 40% drop since the third quarter of 2010. With polysilicon prices hovering in the US$30/kg range, REC is targeting both increased sales volumes and improved margins in poly by the end of 2011. It should be noted that FBR poly is seen as a lower grade material than conventional high-purity Siemens-based poly and therefore sold at a small discount. REC Silicon is targeting polysilicon production of 20,500MT in 2012, up 8% from 2011. 

Importantly, REC is tackling the lower graded FBR-produced poly problem and is developing processes under its ‘FBR-B’ program that will enable the production of electronic grade material, although, when this will be in production wasn’t revealed. However, work was said to continue over the next few quarters, while other R&D efforts with  Siemens poly technology were focused on increasing production allocated to float zone applications.

Overlaying REC’s polysilion strategy to the wider market, it would seem that the attractiveness of long-term polysilicon contracts is not only waning but could be in the early days of a perennial decline. Various Tier-1 PV manufacturers have noted in recent quarterly conference calls that due to the long-term pricing trend for poly, the security of plenty of supply is justification for moving away from long-term contracts.

With REC guiding FBR poly cost as low as US$13/kg by the end of the year, it also attempts to point out where spot prices are eventually heading.

Furthermore, with other major producers such as Hemlock Semiconductor and Wacker also suffering from weaker demand and falling prices, the temptation to follow REC into the spot market must be increasing.

Wafer woes

There is no doubt that the problem child within REC’s business groups is REC Wafer. We have already reported on plant closures in Norway as these operations were pragmatically declared to be uncompetitive now and in the future and so needed to be shuttered.

REC reported that about 50% of the wafer capacity in Norway had now been permanently closed, while around 25% of original wafer capacity in the country was operational. In total, REC has cut 775MW of wafer and 180MW of cell capacity in Norway.

Regretably, REC management also said that due to current pricing conditions, wafer production in Norway was not guaranteed. The company went further, noting that despite a small rebound in wafer pricing in the fourth quarter, further price rises, coupled with lower production costs would be required for the company to keep operating the remaining capacity. Management noted it had started preparations in the event of a full shutdown of wafer production in Norway.

To avoid a significant inventory build as customers preferred to pay cash sums to cancel long-term wafer contracts, REC said it had aggressively priced wafers in the fourth quarter. As a result, wafer ASPs fell 31% in the quarter, while making-up 77% of REC’s sales volume.

The backdrop was spot market prices for multicrystalline wafers falling 69% in 2011, with spot prices falling 38% alone in the fourth quarter. Monocrystalline wafer prices didn’t fair much better, declining 40% in 2011 and 16% of that total in the fourth quarter. REC reported that mono prices fell sharpest near the end of the year.

REC has therefore provided further evidence of a major overcapacity issue in the wafer sector. Recently, Sumco announced it would exit the business altogether, citing ‘structural’ overcapacity issues for its decision. Not surprisingly, REC didn’t provide guidance on 2012 wafer production.

Quasi-mono move

Management also mentioned that a potential lifeline for wafer operations could be in the making via ‘quasi-mono wafer production. Describing it as ‘Monocast,’ but not to be confused with GTAT’s new ‘MonoCast’ technology offering, REC said that it had been evaluating the technique and that development tests showed real promise and were now evaluating when to go into production.

REC noted that its proprietary and patent pending Monocast solutions increase the mono fraction of the ingot above what it claims has been available on the market. However, GTAT has just officially launched its technology offering in this field with promises of even greater benchmark performance later in the year.

REC has therefore added its name to the quasi-mono move, which looks increasingly like it will become the major technological innovation to be adopted as the future of wafer manufacturing for the solar industry. Those wafer producers that fail to migrate significant capacity to this technology face extinction.

Singapore swing

REC reported that module ASPs declined 15% in the fourth quarter and accounted for 25% of sales volume in that quarter. The fall in polysilicon prices have helped lower module costs at its state-of-the-art integrated production plant in Singapore. However, overall cost reductions have been remarkable since ramping capacity continued in 2011 from its opening in the second-half of 2010.

REC detailed cost reductions achieved of 20% between 3Q10 and 2Q11 that continued albeit at a slower pace of 5% between 2Q11 and 3Q11. Overall, REC claimed module costs had declined 30% since the second-half of 2010.

This resulted in module costs of €1.01/W by the end of 2011.

Not surprisingly, further cost reduction goals of 30% were detailed for 2012. Polysilicon price declines will continue to be positive to cost reduction goals this year. REC noted that cost reduction drivers include better sourcing of materials, improved operational performance at the Singapore plant, which included de-bottlenecking and higher equipment availability as well as the benefits of economies of scale.

Module production expansion

REC reported total module production amounted to 163MW in the fourth quarter, a 10% decline from the previous quarter. Production in the Singapore facility was said to have been reduced to accommodate maintenance and certain modifications to the manufacturing line.

Overall module production in Singapore reached 699MW in 2011 and is targeted to reach 750MW in 2012.

A problem that all module manufacturers faced in 2011 was inventory build and REC was no exception. However, REC was able to reduce inventory in the quarter to NOK 830 million. The company said that 40% of remaining module inventory was actually in transit from Singapore to key markets in Europe and the US.

High-efficiency low cost modules

With tool upgrades carried out to support higher efficiency cell production, REC has set targets to increase average cell efficiencies to 18% in 2012. Key to the efficiency gains was said to be a focus on POCl diffusion, selective emitters and backside passivation processes which are in the final stage of process development for introduction into volume production.

Combined with using Monocast wafers, REC is targeting shipments of the higher performing modules later in the year. Importantly, the cost and efficiency improvements are targeted to achieve production costs of €0.70/W in the fourth quarter of 2012.

Like most PV manufacturers, REC isn’t in a spending mood. Having made significant investments in polysilicon and module production in recent years the focus is on cashflow and optimization. Therefore capital expenditure was guided to be below NOK 1 billion (€132 million) in 2012 and focused on new technology introduction across poly, wafers, cells and modules.

REC management still expect price declines across the value chain to continue in 2012. However, given the expectation that declines in 2012 will have to be tempered as the industry goes through a period of profitless prosperity, REC could be in a better position in the second-half of 2012 than it was in the same period last-year.

REC had a mountain of information to share in full-year results setting the scene for many in 2012.

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