Are alternative-energy stocks the new tech stocks, or are they simply socially responsible stocks and funds in disguise?
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By David Callaway
Market Watch
NEW YORK (MarketWatch) -- Are alternative-energy stocks the new tech stocks, or are they simply socially responsible stocks and funds in disguise?
That's the question investors need to ask themselves before they cast their hard-earned savings into the widening flood of assets flowing into anything bearing the name "green" or "alternative energy."
Certainly, as the MarketWatch special "The Heat Is On" series has been describing this week, an industry is already growing around the issue of climate change and pollution fighting, despite the fact that the debate over global warming continues to rage in political and academic circles. See the full special report.
But whether the industry can produce the type of technological breakthroughs and innovations that a young Microsoft (MSFT, Apple (AAPL), or even Google (GOOG) produced -- and the profits and stock run-ups that followed -- remains an open question.
In short, will this industry change the world, with all the benefits to investors -- not to mention to the world -- that would bring? Or will it just be another in a long line of Wall Street fads, dreamed up to pitch to gullible investors looking to make money and feel good at the same time.
Everybody remembers the socially responsible funds, which attempted to invest only in companies that steered clear of such practices as working with dictatorships and human-rights violators, or producing products -- such as cigarettes or alcohol -- deemed harmful to society.
Many of them produced tidy little returns. But none compared with the power of shares of Philip Morris Cos. over the last three decades.
Even after changing its name to Altria Group Inc. (MO), in an attempt to change society's perception of it as a purveyor of cancer, the shares have continued to soar over the past several years.
Let's face it: When it comes to investing, feeling good is nice, but profits are what drive stocks. And most investors are not shy about going where the profits are, even if they don't smoke, drink, gamble or support drilling for oil in global hot spots.
What sets the alternative-energy stocks and other makers of clean technology apart is that in this case it is typically the big energy companies that are at the forefront of these issues, anyway. Exxon Mobil Corp. (XOM), Chevron Corp. (CVX) and the rest, affectionately known as Big Oil, are behind some of the most dramatic innovations in alternative energy, if only as a hedge against the potential loss of their main businesses in the decades to come.
And while the markets for carbon trading, weather futures and other forms of global-warming-focused investing are booming, they are, like any new markets, bound to suffer growing pains in the form of scandals over the next several years, as investors get duped by too-good-to-be-true ideas and technologies.
The scars suffered by the energy-trading industry after Enron Corp.'s collapse have largely healed and been forgotten, at least by rank-and-file investors and certainly by Wall Street. But the potential for abuse of these young markets is still very much alive.
So the lesson for investors is to keep history in mind when jumping onto the bandwagon of alternative energy, clean technology or any other environmentally led investment play. Out of all these companies, both new and old, rushing to make a name for themselves in this league, undoubtedly a few will emerge to actually change the world for the better.
Whether you can make money on them, however, is a whole different issue.
David Callaway is editor-in-chief of MarketWatch.
My energy guru Scott tells me it is very difficult to buy solar panels. To me this says "chicken on the hill for investors (money)". The article on the next page highlights the problem and the opportunity. If you have additional ideas or would care to promote a stock hit the comments button and "sound off".
By Matt Andrejczak
MarketWatch
SAN FRANCISCO (MarketWatch) -- Global warming is juicing the price of a key ingredient used to make solar panels, raising questions about what the longer-term impact of the current shortage will be.
Polysilicon is an essential raw material in the production of solar cells for panels that convert sunlight to electricity for homes, businesses and farms.
Since 2004, average contract prices for securing long-term supplies of polysilicon have skyrocketed, more than doubling to $70 per kilogram.
Not lucky enough to have a long-term contract? Spot-market prices for polysilicon are daunting: Expect to pay $200 per kilogram on the spot market, compared with the $150 paid in 2006, according to industry watchers.
The supply crunch has thrust the polysilicon business -- once the all but exclusive territory of semiconductor makers -- into high gear. Novel financing deals and new partnerships are afoot, with solar-module makers scrambling to secure long-term deals and chemical manufacturers scrambling to boost factory output by 2008 and beyond.
JA Solar Holdings (JASO) Last: 27.13
SunTech Power Holdings (STP) Last: 38.82
Canadian Solar Inc. (CSIQ) Last: 11.50
The situation is more acute for some solar companies than others.
Faced with escalating prices and tight supplies, two companies have swapped equity for polysilicon in pacts to help future sales. Those deals have raised eyebrows.
South Korea-based DC Chemical Co. acquired a 15% stake in Massachusetts-based Evergreen Solar Inc. (ESLR) Last: 9.55
In another deal, China-based SunTech Power inked a 10-year supply pact with MEMC Electronics Materials Inc. (MEMC) Last: 60.88
The Evergreen-DC Chemical deal, in particular, carried a "steep price to pay for polysilicon supply," said Jeff Osborne, an analyst at CIBC World Markets, which has helped take a number of solar companies public.
In mid-April, Evergreen agreed to issue 4.5 million shares of restricted common stock and 625 shares of restricted preferred stock to DC Chemical, which bought 3 million shares of Evergreen at $12.07 each. Under the supply deal, Evergreen is to receive enough polysilicon to make roughly one gigawatt of photovoltaic solar panels through 2014.
Supply crunch
The supply crunch is exerting collatetal pressure on the semiconductor industry, which has long been the primary buyer of polysilicon, the chief material used to make the wafers onto which microchips are stamped.
"Global warming is not good for the semiconductor industry. The solar industry is growing very rapidly. ... It's really created demand in past several years that wasn't there before," said Tom Linton, who negotiates polysilicon deals for Freescale Semiconductor, one of the world's larger chip manufacturers.
Before the solar companies came onto the scene in a big way, chip firms usually inked three- to six-month supply contracts with polysilicon producers. Now "you've started to see that elongate towards one- or multi-year contracts," said CIBC's Osborne.
The solar market's big polysilicon push came in 2006. For the first time ever, solar-panel makers consumed as much polysilicon as did the chip manufacturers, purchasing more than 50% of the silicon wafers produced in 2006 -- up from 10% in 2000, according to industry sources.
Polysilicon prices weigh more heavily on solar-panel makers, with the raw material making up 40% to 45% of the cost of goods per solar cell, compared with just 3% to 7% for a microchip. For that reason, solar-panel makers typically seek six- to 10-year supply contracts, Osborne reported.
On the solar horizon
The polysilicon shortage has stunted the growth of the solar industry, keeping it from expanding faster than the 20% pace it set in 2006, based on the number of installations worldwide. Yet a long-running supply-demand imbalance cannot be assumed, with forecasting polysilicon-market dynamics tricky and growing trickier.
For solar-panel manufacturers, future needs hinge on a number of questions:
How fast will solar take off in the U.S., Spain and other countries beyond Germany and Japan, the world's two biggest solar-installation markets?
How fast will solar-panel prices drop versus the price of electricity?
Will other solar technologies challenge the primacy of polysilicon?
"You have some questions there," said Jesse Pichel, an analyst at Piper Jaffray, which has helped raise money for solar-panel makers. "No one is really sure how it will play out."
Such factors and others make it "difficult to accurately estimate polysilicon demand for photovoltaic production," agreed Gartner Inc. analyst Takashi Ogawa, who forecasts worldwide polysilicon demand.
Alternatives in alternative energy
MEMC, Hemlock Semiconductor, Renewable Energy Corp. and DC Chemical are all building or expanding manufacturing sites in a bid to relieve supply pressure. Meanwhile, new entrants are also moving into the market, as 88% of the polysilicon supply is currently controlled by five players.
It takes at least two years to construct a polysilicon factory, which cost between $500 million and $1 billion. "The reality is [that] some of these plants may be significantly delayed, and some of the polysilicon makers maybe overstating their plans," Pichel said.
By 2010, global polysilicon available for sale is expected to reach 99,500 metric tons, up from 35,400 metric tons in 2006, according to CIBC's latest forecast, issued in late April, which estimates 25% more polysilicon will be available in 2010 than its prior projection.
CIBC estimated an "acute shortage" through 2008. Relief could come in 2009 at the earliest, in CIBC's view.
But the supply shortage has inspired exploration of alternative solar technologies that don't rely on polysilicon, such as thin-film panels. Whether such alternatives demonstrate efficacy and whether the most ambitious polysilicon-capacity buildouts come to fruition will ultimately have a great deal to do with whether the polysilicon crunch tightens or turns into a glut.
Matt Andrejczak is a reporter for MarketWatch in San Francisco.
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MEMC, Hemlock Semiconductor, Renewable Energy Corp. and DC Chemical
Global warming sparks polysilicon crunch
Global warming
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