MEMC Resolves Supply Disputes

Semiconductor and solar technology provider MEMC Electronic Materials Inc. (WFR) reportedly resolved a supply dispute between its Italian unit and specialty chemical company, Evonik Industries.

Germany-based Evonik Industries supplied trichlorosilane (or TCS, which was used as a raw material for the production of silicon wafers) to MEMC’s Italy-based polysilicon facility for producing ultra-pure silicon chips. But MEMC terminated two long-term supply agreements with Evonik, as it had decided to abandon the 6000 (metric ton) MT polysilicon plant in Merano.

Under the terms of the settlement, MEMC will pay €70.0 million (roughly $88.0 million) to Evonik for resuming supply of TCS to MEMC’s polysilicon facility located in Merano, Italy. However, MEMC is not planning to resume its production soon. Of the total obligation, €10.0 million will be paid in the coming quarter, while the rest will be paid in five quarterly installments. The Italian arm of MEMC also announced its decision to acquire Evonik’s TCS manufacturing plant in Merano. But financial details regarding the takeover were not mentioned.

Earlier, in December 2011, MEMC announced a major restructuring effort in order to reduce costs and improve cash flow. The agenda of the restructuring initiative included reduction in global workforce across its business segments, scaling back production capacity and uniting the poorly-performing Solar Materials segment with the Solar Energy segment.

To deal with the oversupply situation in the semiconductor and solar markets, MEMC decided to idle its 6000 MT Merano polysilicon facility, reduce production capacity at its Portland, Oregon crystal facility and limit capacity at its new Malaysia solar wafering facility to 300 MW (mega watt).

These actions were mainly aimed at cost control. MEMC plans to keep these two plants idle till some cost-related issues get cleared with the Italian government.

Though the solar industry is going through tough times, MEMC’s solar business continued to do well in the last quarter, aided by higher sales of solar systems. If the trend continues in the coming quarters, the reopening of the Merano plant could prove to be beneficial as MEMC will be able to produce polysilicon (raw material for producing solar chips) at a cheaper cost.

Though the solar system sales trajectory looks impressive, we are concerned due to cessation of MEMC’s long-term solar wafer supply agreement with Suntech Power Holding Co. Ltd. (STP - Analyst Report), lack of new long-term supply agreements and stiff competition from the likes of JinkoSolar Holding Co. Ltd (JKS - Snapshot Report) and First Solar Inc. (FSLR - Analyst Report).

Currently, MEMC has a Zacks #3 Rank, implying a short-term Hold rating.