How First Solar's Tellurium Deal Shows the Fragile Economics of Solar Panels

First Solar has signed a five-year purchase agreement with a China-based mining company for an undisclosed amount of refined tellurium (Te). The deal underscores the thin-film module maker's need to secure visible, longer-term supplies of its core photovoltaic (PV) commodity -- but also highlights how uncertainty over supplies of the rare metal could monkeywrench some solar-panel makers.

According to the contract, Apollo Solar Energy (ASOE) will provide an estimated $110 million of 5N ("five-nines," or 99.999%) ultra-high purity tellurium -- feedstock for cadmium telluride (CdTe), the semiconducting compound coating First Solar's thin-film PV panels.

The global leader in sales of thin-film solar panels, First Solar (FSLR) had to delay panel shipments last quarter due to capacity constraints. Complicating production problems, the utility-scale PV market is anticipated to surge next year, growing five-times faster than the rest of the industry, according to a recent analysis from IMS Research. With a growing backlog -- 2.2 GW in North America alone -- this new demand supports management's recent decision to nearly double production from 1.4 GW to more than 2.7 GW come 2012.

Given CdTe thin-film solar modules are less efficient at converting sunlight to electrical energy, First Solar has excelled at offering customers the cheapest manufacturing costs, a 20 to 30 percent discount to traditional crystalline silicon (c-Si) PV makers. In second-quarter 2010, the Arizona-based PV supplier posted a new low for module costs of $0.74 per watt. Robust demand and tight inventories of tellurium upstream, however, could challenge attempts to improve manufacturing efficiencies.

"First Solar's problem is not simply one of getting tellurium, but in getting the amount it needs annually," says Jack Lifton, co-founder of Technology Metals Research.

Tellurium is a relatively rare element, with more than 90 percent of global production recovered as a byproduct of copper mining and processing. Despite projections as high as 1,600 tons per annum, the actual global output of tellurium is essentially unknown, as producers rarely publish production numbers. Data published by the U.S. Geological Survey (USGS) puts annual global production at around 200 tons.

In e-mail correspondence, Lifton cautioned:

Tellurium has never been stockpiled -- it has simply not been produced for the most part; it has stayed in the copper or been discarded from copper production in the tailings in which it is far too disseminated for recovery.

More likely, believes Lifton, global production (from all sources) is on the order of 200 to 300 metric tons. Competition for this scarce resource comes mostly from steel manufacturers, where it is used as an alloying additive to improve machining characteristics.

One GW of CdTe PV modules requires 66 metric tons of tellurium -- between 20 to 30 percent of annual global production.

As one of the few miners with alleged commercial quantities of primary tellurium ore deposits, the supply deal with Apollo Solar could prove invaluable to First Solar's expansion plans. Unfortunately, a review of Apollo Solar's regulatory filings with the SEC suggests there are limits as to how much tellurium-ore deposits the miner can recover economically (ignoring other issues, like a number of accounting "red flags" uncovered, such as millions in interest-free loans to major shareholders and liquidity concerns):

At September 30, less than 60 percent of the tellurium used in its refinery operations was sourced from open-pit mines at its leased Dashuigou property, located in Sichuan Province (which borders Tibet in southwest China). Why? Of 25 identified veins, available sampling data indicates that only 3 have significant tellurium grades!

Assuming PV demand remains high enough to keep its additional lines highly deployed, capacity expansions will aid First Solar in reducing its costs -- even further beyond its competitors, according to IMS Research.

Reddy's and IMS' predictions are premised on "Learning Curve Theory 101," which states that "as the quantity of items produced doubles, costs decrease at an often predictable rate."
The learning curve assumes that as volume increases, costs of raw materials will decline, manufacturing efficiency will improve, administrative and distribution costs can be spread over higher production volumes, and other economies of scale can be realized.

True, as tellurium becomes a cost-limiting factor, manufacturing will shift to thinner layers -- currently about 3 microns thick -- and still maintain module performance. Learning curve has demonstrable histories of success. Unfortunately for CdTe manufacturing, the technological know-how to "thin down thin-film" hasn't arrived yet.

Furthermore, as Jack Lifton told me, "we may already have seen a peak of tellurium production, since no one will now mine any copper or lead merely to recover some tellurium traces. The economics of that do not and cannot ever work."

Unless, of course, the price per kilogram for tellurium soars -- crushing First Solar's profit margins.

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