LOS ANGELES/NEW YORK, April 21: The mad dash to build polysilicon plants for the solar industry is beginning to slow as prices for the raw material start to retreat from their 20-fold increase in recent years.

Still, production of the material, which is used for computer chips, as well as converting sunlight into electricity inside solar cells, is likely to triple in the next three years, easing the shortage that has plagued makers of photovoltaic solar systems.

That expected increase is already pushing down prices for longer-term supply contracts, according to industry experts and is forcing some companies to rethink proposed plants.

Last week, China’s Trina Solar Ltd scrapped its plan to build a $1 billion polysilicon plant, saying it expected to buy supplies in the expanding market.

“It’s hard to justify that capital expense when you are heading into a situation of oversupply,” said Ted Sullivan, an analyst at Lux Research who forecasts that supplies of polysilicon will outstrip demand as soon as 2010. “It’s really only a matter of time before these project financiers or solar companies really wake up and smell the coffee that it doesn’t make much sense sinking $300 million into a new plant.”

An oversupply of polysilicon is possible, Sullivan said, despite the rapid growth of photovoltaic solar cell production, which has been doubling about every two years to meet the growing appetite for clean sources of energy.

Lower polysilicon costs should help cushion solar makers’ margins, which are expected to shrink as more production of cells and modules comes on line. That margin pressure may hurt in the coming quarters, although analysts say it will also spur demand for solar power by making it competitive with electricity from dirtier sources, such as coal-fired power plants.

“Long term that’s good for the solar market ... it’s ripping off the bandage, if you will,” said Sullivan.Polysilicon currently sells for $450 per kilogram or more on the spot market, while long-term contracts can drive that down to about $50 to $120/ kg, according to Lux Research. Prices hit a low of about $23/kg in 2003, just before a dramatic surge in demand from both the semiconductor and solar industries.

Producers of polysilicon, which include Hemlock Semiconductor, a joint venture o1wned by Dow Chemical Co and Corning Inc, and South Korea’s DC Chemical Co Ltd have announced plans to expand output aggressively, and solar companies, including wafer maker LDK Solar Co Ltd, have even announced their own plants.

Although near-term prices remain high, the tide is shifting in the solar companies’ favour, according to Cowen and Co analyst Rob Stone.—Reuters