Q-Cells terminates supplier contract as row with LDK Solar turns nasty

German solar cell manufacturer Q-Cells has terminated its supply agreement with China-based silicon wafer manufacturer LDK Solar, accusing its erstwhile partner of failing to deliver on the contract as promised.

The move prompted an immediate counter accusation from LDK Solar, who said the German firm had requested that shipments be suspended as it attempted to address an oversupply of solar panels across the industry.

In 2008, the two firms signed a 10-year contract for the supply of the wafers - a key component in the manufacture of solar cells - which saw Q-Cells hand over $244.5m to LDK Solar as a prepayment before the first batches were delivered.

The agreement specified that LDK Solar would supply wafers to Q-Cells totalling 43,000 metric tons for the years 2009 to 2018, with 1,000 metric tons to be delivered in 2009.

Q-Cells said in a statement yesterday that LDK solar did not fulfil "significant contractual obligations", claiming it has not delivered the silicon wafers it had promised in 2009.

LDK Solar vigorously denied the accusation, stating that deliveries were made as promised in the first quarter of this year, but were then suspended at the request of Q-Cells in March as the two companies looked to renegotiate the contract.

LDK, whose shares fell 20 per cent yesterday on news of the termination, also said it has the wafers waiting to be shipped should Q-Cells want them.

"LDK Solar firmly believes it has performed substantially on all its obligations under the supply agreement," the company said in a statement. " This termination is without any valid basis."

Q-Cells indicated it may try to reclaim the initial $244.5m payment, which is currently being held as a bank guarantee.

LDK Solar said that such a move would constitute a wrongful drawdown under the supply agreement and thus "violates the purpose of such bank guarantee".

The District Court in Berlin initially prohibited Q-Cells from drawing down the bank guarantee, but that injunction has now been lifted.

The contract specifies that in the case of disagreement, an arbitration process should take place at the International Chamber of Commerce (ICC) in Paris and LDK hopes to take up its case with Q-Cells there.

At the root of the dispute lies the oversupply of solar panels, which has characterised the market over the past year with the recession leading to curbed demand just at the time when many manufacturers were scaling up capacity. As a result, the price of solar cells has fallen sharply and Q-Cells was forced to downgrade its 2009 outlook earlier this year and instigate job cuts.

The oversupply of panels has also had a knock-on effect on the silicon wafer market, causing the price to fall sharply.

In August, Q-Cells issued a statement saying that oversupply of silicon wafers had led to a price fall way below what it agreed with suppliers for 2009 contracts, and that as a result it was looking to renegotiate supply deals.

"In 2010, the contracts will be brought into line with the market price so that this disadvantage will largely be eliminated," it said in the statement.

SES Research analyst Karsten von Blumenthal told Reuters that it was likely the drop in wafer prices had influenced Q-Cells' decision to terminate the contract. "It is likely that wafer prices agreed in the contract were far higher than the current market prices, so Q-Cells would have a good reason to terminate the agreement," he said.