November 3, 2009 ndash; Yesterdayrsquo;s announcement from Q-Cells (QCE.DE) and LDK Solar (NYSE:LDK) that Q-Cells trying to terminate a 10-year supply deal highlights a serious problem for the solar sector which it continues to work through. Back in 2007 and early 2008 these long-term supply deals were so attractive, providing long-term visibility and massive backlogs to solar firms. They drove the markets and it sounded great to be able to announce multi-hundred million dollar deals.

The problem is that the economics shifted (oversupply, tight credit markets) and the terms became totally unattractive (prices today are so much cheaper than the long-term price schedules for the supply agreements) so companies are trying to back out. This is not a surprise to anyone and most of the competent analysts were focused on this risk back in mid-2008, which is a key reason why solar companies pulled back to 1x book valuations. But the news still stings, and when firms pull out of these agreements it is seen almost as an indictment on the supplier for not being able to renegotiate terms. We have seen similar issues with Hoku, JA Solar, REC etc.

The problem in this case with LDK is that it compounds the uncertainty that has been building since the company announced its VP of Manufacturing resigned ndash; who was charged with leading the build-out of the poly facility. nbsp;It isnrsquo;t a surprising move for Q-Cells given that the company has been absolutely cash-challenged and hasnrsquo;t been showing any signs of resilience lately. There have been expectations that the company is going to need to do something strategic, and it looks like they have played their first cards.

I am inclined to sell some puts on LDK into further weakness ndash; and will keep you posted.

Here is the news:

Q-CELLS TO RECLAIM USD 244.5M FROM LDK SOLAR AS 10-YEAR SUPPLY DEAL GOES SOURnbsp;
02 Nov 2009 / Solar / TOP STORIES / GermanyGerman PV cell maker Q-Cells says it is terminating a 10-year supply contract with Chinese wafer maker LDK Solar and is aiming to reclaim USD 244.5m of payments.The two companies signed a supply contract in 2007 by which LDK Solar (NYSE: LDK)nbsp;would deliver more than 6GW of solar wafers to Q-Cells over a 10-year period starting in 2009. The deal was based on 43,000 tonnes of silicon from 2009 through to 2018 and for 1,000 tonnes of silicon this year.nbsp;

Q-Cells (Deutsche Bourse: QCE) says the two companies agreed that the price would be set based on the cost of silicon plus a processing fee but that to be able to specify the price LDK would have to have either a separate facility or a separate line dedicated to the production for Q-Cells. However, LDK failed to separate the production and Q-Cells rejected the price quoted by LDK. LDK was not immediately available for comment.

The two companies disagree on the termination of the contract and neither direct discussions nor a parallel arbitration at the International Chamber of Commerce in Paris have resulted in a settlement.nbsp;

Q-Cells made an advance payment of USD 244.5m back in early 2008 when there was a shortage of polysilicon in order tonbsp;secure the deliveries. The payment was secured by a bank guarantee at a German bank and now that the deal has gone sour, Q-Cells wants to reclaim the money. The German manufacturer saysnbsp;that an application by LDK Solar for a temporary injunction against a drawing down of the bank guarantee was refused by the District Court in Berlin and that Q-Cells would make use of the possibility to draw down the bank guarantee linked to the payment.

LDK Solar shares traded down 13.4% on the news and Q-Cells shares dropped 3.3%.

Important Disclosure: This information is intended to assist investors.nbsp; The information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice.nbsp; Any such offer, if made, will only be made by means of a confidential prospectus or offering memorandum or management agreement.nbsp; It is not our intention tonbsp;state, indicate or imply in any manner that current or past results are indicative of future results or expectations.nbsp; As with all investments, there are associated risks and you could lose money investing.nbsp; Prior to making any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of that investment.

Last 5 posts by Small Cap Pulse

• A-Power (Nasdaq:APWR) Breaking Out - We Are Writing Covered Calls - November 25th, 2009
• LDK Solar (NYSE:LDK) Beats Street - Back in Black - November 23rd, 2009
• Cowen’s Stone Maintains Suntech (NYSE:STP) at NEUTRAL on Q3 Earnings Report - November 20th, 2009
• Cowen’s Stone Comments on Trina Solar (NYSE:TSL) Q3 Earnings - Maintains OUTPERFORM - November 20th, 2009
• Cowen’s Stone Raises Estimates on China Sunergy (Nasdaq:CSUN) - Maintains NEUTRAL - November 19th, 2009