Silicon Pricing Creeping Up On First Solar

Is First Solar in danger of losing its title as the king of low-cost solar panel maker?

The Tempe, Ariz.-based company said Thursday it plans to set up arebate program in Germany, one of its largest markets, in order tobetter compete with companies that have sharply lowered their panelprices as a result of a rapid decline in silicon pricing.

"Across Q2, we observed some aggressive pricing behavior on the partof some manufacturers in order to drive sales into the German market,"said Michael Ahearn, CEO of First Solar, during a conference call todiscuss the company’s second quarter earnings. "We will discount ifnecessary to defend ourselves in this core market."

The pricing war has caused some project investors and developers todefer making buying decisions and waiting to see "how the pricereductions play out," Ahearn said.

The announcement from one of the world’s largest solar panel makerseemed to have caused some concerns among investors. First Solar’sshares dropped about 3.4 percent to reach $167.60 per share inafter-hour trading.

First Solar expects the rebate program to contribute to a smallergross margin for the rest of this year, said Jens Meyerhoff, chieffinancial officer of First Solar.

The company would dole out the rebates only after its panels havebeen installed, Meyerhoff said. The incentives would apply tocommercial rooftop projects.

First Solar would track silicon pricing closely to determine howmuch it would offer to its customers, Ahearn said. The company wouldrun the program as long as it deems necessary, he added.

For months now, analysts and solar companies have wondered about theimpact of silicon pricing on First Solar, which uses cadmium-tellurideinstead of silicon for its panels.

Silicon prices have fallen significantly over the past year. In fact, the long-term contract price has dived about 50 percent,close to the spot market price of $67 per kilogram, or aboutmce_marker.50 per watt, said the London-based New Energy Financeearlier this week.

Silicon used to fetched more than $300 per kilogram on the spotmarket and $150 per kilogram for long-term contracts a few years ago,when solar companies competed with chip makers for the raw material.Silicon producers began to build new factories.

The worldwide financial market crisis, which has lowered the demandfor solar panels over the past 10 months, has caused the producers toslash their prices.

Many silicon solar panel have renegotiated or even canceled their contracts, New Energy Finance said.

First Solar has stood out as the only non-silicon player whooccupies a spot on the list of top 10 solar panel makers worldwide. Thecompany has won lots of admiration from investors and even fellowcompetitors for its ability to keep manufacturing costs low whileproducing good products.

In fact, First Solar was able to lower its production cost by 6.5percent from the first quarter, the company said. The manufacturingcost reached mce_marker.87 per watt in the second quarter.

The company reportedly is selling its panels at below $2 per wattwhile silicon panel makers are selling theirs at roughly $2.25 to $2.50per watt.

But its pricing lead is likely shrinking. New Energy Finance saidthe silicon prices are low enough that major panel makers could selltheir products at below $2 per watt and still "make a small profit."

While many of its competitors seen revenue declines or even losses,First Solar has continued to improve its financial results. The companyreported $525.9 million in revenue for the first quarter, up from$418.2 million in the first quarter and $267 million in the secondquarter of 2008.

The company posted $180.6 million in net income, or $2.11 per share,for the second quarter, compared with $164.6 million, or $1.99 pershare, for the first quarter and $69.7 million, or mce_marker.85 pershare, in the year-ago period. 

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