MEMC, Suntech end wafer supply agreement

CALIFORNIA, USA: Suntech Power Holdings Co Ltd ended a deal to buy silicon wafers from MEMC Electronic Materials Inc, as falling silicon prices made the contract unattractive in its current form.

MEMC, which supplies the raw material for the solar and semiconductor industries, has agreed to supply solar wafers to Suntech over a 10-year period, with pre-determined pricing, on a take or pay basis, from January 2007.

However, falling silicon prices led to the contract being amended twice in 2009 to cut the price and raise volumes. But, as prices continued to drop to $50 per kilogram in the first half of this year, MEMC and Suntech mutually ended the contract.

Suntech -- the biggest volume producer of solar modules -- will instead look to ramp it own production of the wafers, thereby lowering manufacturing costs that would occur if the product had to be sourced from a third party.

Solar companies like LDK Solar and Trina Solar Ltd are looking to cut costs to offset falling subsidies and earlier today, JA Solar Holdings said it would buy a wafer maker to raise its internal wafer capacity and lower manufacturing costs.

Suntech was on track to meet its second quarter shipment guidance of low single digit sequential growth, despite no longer being required to buy about 4.6 gigawatts of wafers from MEMC till 2016, it said in a statement.

Suntech accounted for more than half of MEMC's wafers sales in 2009, but the China-based company's contribution had kept falling to be almost negligible in the current quarter, MEMC said in a separate statement.

Suntech expects to save more than $400 million in the next five years by ending the deal. It also expects to take a charge of $212 million in the current quarter and a non-cash accounting charge of about $92 million.

Suntech has agreed to pay MEMC a termination fee of $120 million, of which $53 million had been previously paid as part of the contract and the remaining $67 million is payable by a letter of credit, MEMC said.

MEMC, which expected to get $5-$6 billion over the 10 year period of the deal, said it was still evaluating the financial impact of ending the deal on its current quarter's results.

Suntech also said separately it will discontinue its investment in CSG Solar AG, which does R&D of specialized crystalline silicon thin film technology, and take a one-time, non-cash charge of about $24 million in the current quarter.

MEMC's shares were down about 3 percent at $8.26, while those of Suntech were down 2 percent at $7.72 in late morning trade Friday on the New York Stock Exchange.