MEMC, Suntech drop solar wafer pact

Suntech is paying $120M to MEMC to end a 10-year wafer supply pact halfway through, in hopes of rearranging its sourcing options and save $400M.

July 5, 2011 – Blame the 2009 downturn for changing the rules of pricing and volumes: A 10-year pact between MEMC and Suntech, already five years through, is being called off, with a large payoff to MEMC and two ex-partners going their separate ways.

The original deal, signed in July 2006, called for MEMC to supply solar-grade silicon wafers to Suntech for a 10-year period with predetermined pricing, expected to cumulatively generate $5-$6 billion in revenues for MEMC. But the dynamics of wafer pricing and supply are not what they were five (or even two) years ago, and wafer suppliers and customers have developed a history of trying to tear up old long-term supply deals in favor of new deals with better terms.

Under the original deal, Suntech also gave MEMC undisclosed funds to help expand capacity, as well as a warrant to purchase up to a 4.99% stake in the company. Now, with Suntech cancelling the contract, it says it will pay MEMC $120M — a $67M letter of credit to be drawn in four equal quarterly installments through April 2012, plus handing over an existing $53M cash deposit.

Following two earlier renegotiations (in February 2009 and July 2009), the companies resigned to solving their differences by terminating the supply agreement, according to MEMC’s version of events. For MEMC it’s less of a big impact, since Suntech’s portion of its sales had sunk from 50% in 2009 to ~2% in 1Q11 and zero percent in 2Q11.

For Suntech, it expects to incur a $92M noncash charge and total of $212M of expenses related to this contract termination. But as a result, it’s freed from the commitment to purchase ~4.6GW of wafers over the next four years, and can reoptimize its sourcing strategy (including internal wafer production) to save $400M over the same period.

In Suntech’s version of the breakup, “the termination of this agreement with MEMC will bring greater flexibility to our sourcing strategy and help us benefit from the continuing drop in silicon and wafer prices,” stated Suntech chairman/CEO Zhengrong Shi. “While these charges are significant, they are all non-recurring and our core operations continue to perform well.”

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