“Everyday, we make sure there is US$100-200 million in cash in our accounts,” says Li Xianshou, CEO of ReneSola Ltd., a Zhejiang-based manufacturer of solar wafers. He also stresses this is “real cash” and that the amount cannot be reduced.
ReneSola is a solar cell silicon wafer manufacturer, the number two supplier to leading solar energy companies like Suntech Power and JA Solar, as well as the biggest supplier to Jetion Holdings Limited. By the end of 2008, ReneSola’s production capacity is scheduled to hit 700 megawatts, with sales forecast to jump to RMB5 billion (US$727.1 million). Ranked by production capacity, it’s already the world’s number three silicon wafer supplier.
But the current financial crisis sweeping the world and the possibly subsequent global economic depression is giving everyone the shivers. ReneSola is no exception, and it’s taking measures to protect itself by maintaining a high level of liquidity. The company doesn’t want to be caught on the wrong foot if a major client goes bust or if the bank abruptly stops providing loans.
However, despite the dour economic outlook and the need to keep hefty cash reserves in hand, ReneSola is still going ahead with the construction of a US$350 million polycrystalline silicon plant in Sichuan. The plant is due to begin operations in February or March 2009. One might ask: Why ReneSola, faced with the current economic climate, is so willing to take such risks?
Crisis or Opportunity?
“The solar energy business, in essence, is about costs,” explains Li Xianshou. “If the cost of solar energy power generation was close to that of fossil power, the market performance would be much different.”
An upsurge in the number of solar energy cell plants has pushed the price of waste silicon from US$14 per kilogram in 2004 to more than US$300 today, and US$500 at peak time. Therefore, even if the energy conversion efficiency has been enhanced from 14% to 17% and the weight of raw material required for each silicon wafer drops from 7.2 to 6 grams (or even to 5 grams over the next two years), rising costs would still dwarf these technological advances.
Considering the price of US$3.7 for a cell plate, the costs for power generation are 0.3-0.4 Euro (US$0.39-0.52) per watt. Now in Germany, power generation costs are 0.1-0.2 Euro (US$0.13-0.26) per watt; 0.2 Euro (US$0.2) per watt is the peak time rate. But for the Green Power Retail Strategies in European Utilities, the use of solar energy cells would not be widely standardized. That’s why the global demand for solar cells in 2008 was no more than 6,000 megawatts. In 2008, after Spain implemented the Green Power Retail Strategies on a large scale, silicon prices went soaring again.
“Silicon accounts for 60-70% of solar cell costs. Without the support of our own poly silicon plant, we would never have managed to get our costs under control,” said Li Xianshou. “These costs are normally controlled by upstream operators, to the detriment of the development of long-term competitive edge. So we had no other option but to take things into our own hands.”
In August 2007, ReneSola incorporated a wholly-owned subsidiary Sichuan ReneSola Material Co., Ltd in Meishan, Sichuan with an investment of US$350 million to develop a polysilicon production facility with a projected annualized capacity of 3,000 tons. When it’s ready, Li Xianshou intends to expand into the upstream. The company’s polysilicon costs are expected to drop from US$370 to US$80 per ton with the facilities in Sichuan launched into operations. And ReneSola’s goal is to reduce costs to US$30 per ton, 8.1% of the current level. This major reduction in costs would significantly enhance ReneSola’s immunity to risk.
For that purpose, after getting listed on London’s AIM market in 2006, ReneSola went a step further to the New York Stock Exchange on January 29, 2008 to raise US$130 million. No more than half a year after going public on the NYSE, on June 19, 2008, the company issued a new round of shares worth US$200 million. In fact, the first batch of funds had not yet been used, a rarity in the fast moving world of capital markets.
Shortly after the NYSE share issue, Lehman Brothers went bankrupt, bringing the financial markets into crisis. For at least another six months it would be very difficult for any company to raise funding via the capital markets.
Actually, in early 2008 the climate on Wall Street was already very intense. During the whole of January, Li and his team were rushing between stock exchanges and investment banks in New York, gaining a keen experience of the day-to-day agitations of the capital market. However, they reached a stage where they could not wait any longer. Li had intended to have his company go public immediately after the incorporation of its subsidiary in Sichuan, but then the sub-prime lending crisis struck and Li lost confidence in that plan. In January, estimating that the market would worsen further, Li and his advisors decided to move ahead anyway.
Apparently, ReneSola had no idea what would follow. They just feel proud of their sense of urgency that arose from their appraisal and risk assessment of the market. In 2006, after going public on the AIM, ReneSola estimated that the supply shortage in the solar industry would only last for three years. Without a major increase in their competitiveness, they would find themselves under great pressure in a capital and talent-rich industry.
In June 2005, ReneSola was a start-up devoted to the optimization of waste silicon, a material neglected by the market, and the enhancement of its silicon wafer exploitation rate. With thinner silicon wafers, it developed a new market niche. However, competitors soon moved in, driving up the cost of waste silicon. Now, the market price has risen to US$300 per kg, almost equal to that of imported silicon.
In January 2008, ReneSola invested in a semi-conductor silicon material manufacturer in Henan as part of a joint venture agreement, getting closer to polysilicon production in the upstream. Under the deal, the JV company has been supplying most its output to ReneSola. From October 2008 onwards, ReneSola stopped the import of waste silicon as the company prepared to gradually phase out its use by the end of 2009.
“When the price is reduced to US$30 per kg, we will maintain a competitive edge for a long time,” said Li Xianshou. He calculates that ReneSola currently spends about US$2 producing each silicon wafer. But by the end of 2009, the production cost should be reduced to US$1, and power generation costs will be cut down to 0.2 Euro (US$0.26) per watt, equaling that of peak-time fossil-generated energy in Germany. The future of the market looks promising.
“All our strategies are centered on costs: the main cost in producing cells and cell panels comes from silicon wafers, while most of the money spent in making silicon wafers is on polysilicon. With the new poly silicon facilities in Sichuan, we’re now getting these costs under control,” said Li, who is gaining a reputation in the industry for his shrewdness.