MEMC Shines as Play on Silicon Shortage

Also, 25% stakeholder Texas Pacific Group was a big seller of the stock over the summer, and the fresh supply is probably what has weighed on the share price. While TPG continues to hold a sizable stake in the company and further sales are possible, strong industry trends and improving investor sentiment are likely to more than mitigate them.

Strong Trend, Indeed

Germany, Japan and the U.S. represent the three largest solar power markets in the world. Tax incentives and government subsidies coupled with skyrocketing oil and natural gas prices have improved the cost/benefit equation for solar power generation. The break-even period for businesses that elect to install solar panels is approaching the critical three-year time period; 40% of respondents to a survey conducted by First Albany said they would consider using alternative energy products if they could recoup installation costs within three years. As costs come down and solar installations increase, the supply/demand imbalance probably will exacerbate the shortage further.

For decades, silicon was mainly a feedstock for the semiconductor industry to make chips, and supply has been more than adequate to meet demand even during the peak of the dot-com bubble. However, the proliferation of solar power as an economical and clean power source has changed this dynamic dramatically. Now solar power producers are scrambling to lock in supplies as far out as contractually possible.

Silicon producers are doing their best to bring new capacity online. Most recently, German company Siltronic announced plans to spend about $150 million to expand one of its plants. But growth in solar power consumption is likely to outstrip any additional supplies for the foreseeable future. That said, UBS said in a research note it expects silicon supply to expand only 13% in 2006 to 34,000 tons, which probably won't be enough to cover the surge in demand from the solar power industry.