SW CHINA MINERAL RESOURCES FUELING NASDAQ-LISTED COMPANY'S

C O N F I D E N T I A L SECTION 01 OF 03 CHENGDU 000211 SIPDIS E.O. 12958: DECL: 9/30/2019 TAGS: ENRG ETRD EINV PGOV KNNP CH SUBJECT: SW CHINA MINERAL RESOURCES FUELING NASDAQ-LISTED COMPANY'S SOLAR CELL DEVELOPMENT CHENGDU 00000211 001.2 OF 003 CLASSIFIED BY: David E. Brown, Consul General, U.S. Consulate General Chengdu. REASON: 1.4 (d) ¶1. (C) Summary: Executives at NASDAQ-listed Sichuan Apollo Solar Science and Technology Company (SASST) say that access to Southwest China's mineral resources differentiates their company from many competitors in the solar power industry. The company aims to triple their output of high-purity materials used in the production of second-generation solar cells by the end of 2012, and seeks to build a stronger relationship with U.S.-based First Solar. Second-generation cells are faster and less energy intensive to produce, according to one Apollo executive, and will eventually replace silicon-based, first-generation solar cells. End Summary. Mining Rights Key To Broad Network Of Partnerships -------------- -------------- ¶2. (C) Chairman and General Manager of SASST, Chinese national Hou Renyi, recently told Consul General that unlike many recent entrants into the solar energy market, his company had three mines near Ya'an, Sichuan Province that produce the raw materials used in the production of second-generation solar cells. Hou added that his company had prospecting rights in the same area that could lead to the creation of additional mines. While wholly foreign-owned enterprises are prohibited from acquiring mining rights in China, Hou explained that his company has been able to sidestep this barrier by setting up layers of subsidiary companies. He said that the string of subsidiaries enabled SASST to conform to National Development and Reform Commission regulations and still gain access to mineral resources. Hou sees these rights as key to his company's continued growth and likened them to corn or flour, i.e. the basic inputs used to make a wide range of products. ¶3. (SBU) SASST in its Sichuan facilities processes the materials it mines into high-purity products, some of which have contaminate levels lower than one part per ten million. The company has patented six processes it uses to refine materials like cadmium, tellurium, indium, and selenium, which Hou claims differentiate his company from other refiners. About 65 percent of the refined output is exported to the United States, although SASST also exports to at least 13 other countries including Germany, France, Russia, and South Africa. Customers include roughly 32 companies as well as research institutions and universities including Stanford and the University of California at Berkeley. Within China, SASST has partnered with more than 50 research institutes and universities, including Chengdu University of Technology, the China Academy of Engineering Physics, the Shanghai Institute of Technical Physics, and the National Key Laboratory for Surface Physics and Chemistry. Where Does Apollo Fit With The Competition? -------------- ¶4. (SBU) Hou did not give specific volumes of tellurium or other high-purity minerals his company produced, but he cited Canadian-based 5N Plus (5N) as a key competitor. He said that his company had partnered with a Milwaukee-based company named Williams, which had been unable to compete because of its reliance on old technology. Hou even mentioned that Apollo was purchasing stock in Arizona-based First Solar to strengthen ties between the two companies. Apollo does not, however, appear to be a unique or key supplier of any single mineral. Belgium and Canada were the two largest suppliers of tellurium to the United States last year; China accounted for only 13 percent, according to the U.S. Geological Survey (USGS). China in 2008 was the leading supplier of indium and gallium to the United States, according to USGS estimates, but it is unclear what volume of these minerals Apollo produces. Based on recent financial performance, Apollo is far smaller than 5N or First Solar. Apollo posted a USD 1.1 million net loss in the first half of 2009 year-on-year with total revenues of only USD 4 million. 5N posted USD 17.3 million in net income for the first half of this year on USD 57.5 million in revenue. In the second quarter 2009 alone, First Solar announced 180.6 million dollars in net income. Bullish Outlook: Government Supporting Solar Industry Growth CHENGDU 00000211 002.2 OF 003 -------------- -------------- ¶5. (SBU) Hou, who owns 40 percent of SASST shares, said that his company currently produces 1,000 tons of high-purity products annually, and he expects this to increase to 3,000 tons by the end of 2012. SASST produces the materials that are used in the two main categories of second generation solar cells based on 1) cadmium telluride (CdTe) and 2) copper, indium, gallium, sulfur (CIGS). Hou primarily discussed CdTe solar cells, but said that his company also supplied products to CIGS producers in Taiwan and Germany. He felt confident that first-generation solar cell production was in its waning days. In countries like Germany, newer solar technology will soon supplant silicon cells. Government subsidies are the only reason why the silicon solar industry in Germany is still afloat, according to Hou. The cost to produce a silicon solar cell in China is roughly half the cost to produce it in Germany. Even in the production of second-generation cells, China maintains a significant competitive advantage because of low labor costs; a SASST worker makes between USD 22-29 per day. (Note: SASST currently employs 400 employees, 140 of whom are miners. End Note.) ¶6. (SBU) Hou said that this year the Chinese central government provided about USD 1.2 billion to foster the growth of alternative energies broadly. Next year the figure will jump to about USD 2.9 billion, with potential additional support coming from local governments. The Chengdu city government in September published a brief explanation of their plan to support the development of alternative energy. This plan specifically includes support for thin-film CdTe and CIGS solar technology, although the plan does not say what kind of financial support will be provided. Hou mentioned that the Chengdu government has designated SASST as part of a key, "dragon head" industry and provided the company with a three-year tax holiday, which ended in 2008. (Note: The Ministry of Science and Technology (MOST) is promoting the expansion of solar power under the "Golden Sun" project, which aims to add up to 500 megawatts of new solar power over the next few years; solar industry websites suggest that this project may be included in the first draft of China's renewable energy stimulus plan. End Note.) Second Generation Production Efficiency Advantages, Create Less Pollution to Create -------------- -------------- ¶7. (C) CG asked Hou about the energy input needed to produce CdTe or CIGS solar cells as compared to first-generation silicon solar cells. Hou said that a recent "South China Morning Post article" on this topic was half right. He agreed that producing poly silicon solar cells probably required more fossil fuel inputs and generated more pollution than would be saved by using the solar cell, but he added that this was not true of CdTe solar cells. He said that producing one ton of poly silicon generated 12 tons of waste; it requires 500 watts of energy to produce a single kilogram of poly silicon. The newer generation of products do not suffer from the same inefficiency, according to Hou, although he did not provide specific figures for how much energy it took to produce second-generation solar cells. Pushing For U.S. Partner Firm To Relocate To Chengdu -------------- -------------- ¶8. (C) Hou discussed further his company's relationship with First Solar. He said that National People's Congress Standing Committee Chairman Wu Bangguo recently visited First Solar and signed an agreement to build a production facility in China's Inner Mongolia Autonomous Region. Hou hoped that First Solar could be encouraged to open its production facility in Chengdu rather than Inner Mongolia as this would reduce SASST's cost for shipping raw materials and would drive down the cost of a finished solar cell. (Note: First Solar's press release in March said that the company had 23 manufacturing facilities in three countries: the United States, Germany, and Malaysia. End Note.) CHENGDU 00000211 003.2 OF 003 ¶9. (C) COMMENT: Hou may have access to information about First Solar's development plans that has yet to be publicly announced, or he may be unclear on the nature of First Solar's recent agreement. Beijing Emboff heard during a recent trip with MOST Minister Wan Gang that First Solar plans to build a solar power plant in Inner Mongolia. There was no mention of plans to build a manufacturing facility, however. First Solar issued a press release in September that discusses Wu's visit, but it does not reference an agreement to build a new facility in China. Several Inner Mongolian officials have close ties to Minster Wan and State Councilor Liu Yandong, who are key leaders in the formulation of solar-related policies. Wan and Liu appear to be trying to promote solar technologies in Inner Mongolia, which could negatively impact the prospects for First Solar locating any planned facilities in Chengdu. END COMMENT. BROWN