UPDATE 4-Q-Cells ends LDK supply agreement, claims guarantee

By Christoph Steitz and Laura Isensee FRANKFURT/LOS ANGELES, Nov 2 (Reuters) - Germany's Q-Cells ended an agreement with its Chinese solar wafer supplier, LDK Solar, a sign that the solar industry is continuing to struggle with an oversupply of materials. Q-Cells, one of the world's largest makers of solar cells, said on Monday that LDK did not fulfill "significant contractual obligations" in a 10-year agreement to supply wafers to Q-Cells. The companies entered the contract when wafer prices were much higher. LDK, whose shares dropped 20 percent on Monday, said in a statement that it "vigorously disagrees" with Q-Cells' claims and plans to defend itself against what it called a wrongful termination. The move comes as manufacturers of solar cells and panels around the world are struggling with oversupply that has driven down prices and curbed demand. Prices for polysilicon -- a key raw material for the solar industry -- and for solar panels have tumbled dramatically in the last year, forcing many players to renegotiate contracts. "People are coping with oversupply and companies are learning that long-term contracts don't mean much in a down cycle," said Oppenheimer & Co analyst Sam Dubinsky. Q-Cells said in a statement that "the contractual parties have differing opinions concerning the validity of the termination of the agreement" and its plans to reclaim a $244.5 million prepayment it made in 2008 related to the agreement. "Discussions between the two companies and a parallel arbitration process at the International Chamber of Commerce (ICC) in Paris have not resulted in an amicable settlement yet," the company added. Q-Cells said that the prepayment was secured by a bank guarantee and could be reclaimed in the event of termination of the agreement. A spokesman for Q-Cells said the company on Monday or Tuesday would apply to draw on the bank guarantee after a Berlin court refused an application by LDK for a temporary injunction against such a move. LDK shares dropped $1.37 to $5.41 in afternoon trading on the New York Stock Exchange, while shares of Q-Cells closed down 2.5 percent. MIXED MESSAGE "The message for Q-Cells is mixed," said SES Research analyst analyst Karsten von Blumenthal. "On the one hand, this will mean a cash injection for Q-Cells which would certainly be of use at the moment. Also, it is likely that wafer prices agreed on in the contract were far higher than the current market prices, so Q-Cells would have a good reason to terminate the agreement." For LDK, the loss of the Q-Cells contract will likely prompt other LDK customers to try to renegotiate their contracts and make LDK's balance sheet "more onerous," Piper Jaffray analyst Jesse Pichel said in a note to clients on Monday. Pichel said the withdrawal of the Q-Cells prepayment could reduce LDK's cash balance by 63 percent to $144 million and that the move "will certainly thwart LDK's ability to secure additional financing." The news comes two weeks after LDK's vice president of manufacturing, Nick Sarno, abruptly left the company. Sarno was in charge of getting LDK's new polysilicon plant up and running. SOLAR OVERSUPPLY The oversupply in the solar industry already forced Q-Cells to withdraw its 2009 outlook and cut jobs. The German company's U.S. rival First Solar last week reported sales below Wall Street's expectations, sending its shares sharply lower after its outlook showed that cell prices were still affected by oversupply. SES Research's Blumenthal added, however, that there was uncertainty now about whether LDK would take any legal steps as a response to the move. This, he said, could be a burden on Q-Cells's stock, as was the case with peer Conergy and its legal dispute with MEMC. The termination also casts doubts on Q-Cells joint venture with LDK, which both companies formed in April this year. Analysts saw the joint venture as the right strategic move for Q-Cells to enter the Chinese market, which is set to become one of the industry's growth drivers, boosted by large government subsidies. "It is difficult to imagine that this won't have an impact on the joint venture," Commerzbank analyst Robert Schramm said. A Q-Cells spokesman said: "At the moment we don't see any fallout (from the termination) on the joint venture." (Additional reporting by Matt Daily in New York; editing by Simon Jessop, Steve Orlofsky and John Wallace) Keywords: QCELLS LDK/ - ([e-mail]; [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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