In Europe, where solar photovoltaic energy is rapidly expanding, domestic solar cell and module manufacturers have entered into numerous long-term supply contracts with upstream suppliers like polysilicon and silicon wafer producers to secure raw materials. However, the sudden financial crisis led to a sharp drop in demand, turning these long-term agreements into burdens rather than advantages.
Li Xianshou, chairman of Zhejiang Haohui Solar Energy Co., Ltd., told CBN reporters on May 5 that the company is currently revising its long-term contracts with customers. This trend isn’t isolated—industry insiders estimate that billions of dollars in contract revisions are taking place across the sector.
Three years ago, the scarcity of polysilicon and a booming solar market pushed prices up to $500 per kilogram. To avoid shortages, downstream companies locked in multi-year contracts with suppliers. But as the market turned, many now find themselves stuck with high-priced commitments.
For instance, MEMC, one of the world’s largest polysilicon producers, recently renegotiated its long-term deals with Suntech and a Taiwanese firm. LDK, a silicon wafer manufacturer, also reported discussions with clients about re-negotiating their contracts. While some companies are considering canceling orders, most prefer to maintain long-term relationships.
Li Xianshou explained that many companies are not taking drastic steps to cancel contracts, as they still value long-term cooperation. Another key reason for keeping contracts intact is the prepayment made by downstream firms, which often exceeds the actual material needs for several years. If all contracts were canceled, these deposits would be lost.
While long-term contracts won't be entirely revoked, their terms are being re-evaluated. Some prepayments are now being shifted from cash to letters of credit or bank guarantees. Companies like Jiangsu Zhongneng Silicon are adjusting payment structures to better align with current market conditions.
Li Xianshou noted that both upstream and downstream companies regularly revisit polysilicon prices every few months, adjusting purchase volumes and delivery schedules accordingly. Suppliers aim to extend delivery times while maintaining order quantities, allowing them to keep the total order value stable.
However, the collapse of the long-order model is inevitable due to falling polysilicon prices, weak demand, and overcapacity in production. By last September, polysilicon prices had dropped from $500/kg to as low as $70-80/kg.
If companies don’t adjust their locked-in prices, it could lead to massive losses. For example, Wuxi Suntech had a $7 billion ten-year contract in 2006, while companies like JA Solar and Linyang New Energy also hold multi-billion-dollar long-term deals.
Moreover, sluggish sales and growing oversupply make the long-term model increasingly unsustainable. A senior executive from a major solar company said that while April shipments improved, the real test will come in May and June.
With global polysilicon production capacity expected to rise significantly in the coming years, prices may continue to fall. The top seven polysilicon producers are set to increase output from 28,000 tons in 2008 to 47,200 tons in 2009, and China alone may reach 9,000 tons this year. By 2010, global production could hit 100,000 tons, leading to a potential oversupply.
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