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Notes to the consolidated financial
statements, REC Group
REC Annual Report 2011
REC Silicon
Sales prices for REC Silicon are expected to decrease significantly
in 2012 compared to the average for 2011, largely due to expected
weak end user markets, but then to pick up year-by-year in
subsequent years but not to return to the average 2011 level. Sales
prices were estimated using current market prices adjusted for
anticipated changes in market dynamics relative to changes in
supply and demand. Where relevant, provisions of contracts with
customers for deliveries in future periods are reflected in estimates
of pricing and volume. However, as the REC internal demand has
decreased, REC Silicon is nowmore exposed to the spot market
prices and demand. Volumes included in the impairment analysis are
near full production capacities. Production volumes are expected to
increase, through improved utilization of the assets, especially for
the granular polysilicon production (FBR).
Increasing production volumes by optimizing plant asset utilization
via a number of operational excellence initiatives, and achieving
stable and reliable plant operations remain the most important
factors to continue to drive down product cost. Furthermore, a
strong cost focus on major cost items such as electricity, natural
gas, Metallurgical Grade Silicon, professional services and labor
is of high priority to further drive down costs.
Estimates of capital expenditure reflect management’s best
estimate of ongoing maintenance capital required to maintain
existing operations.
For REC Silicon, the estimated recoverable amount in excess of
carrying amount at year-end 2011 was approximately 70 percent.
Compared to the assumptions used an unfavorable change in the
estimate for all years of approximately eleven percent for prices,
or fourteen percent for volume or six percentage-point for the post-
tax discount rate would cause the estimated recoverable amount
to be reduced to the carrying amount. Parts of the estimated cost
improvements are dependent on high capacity utilization of the
various production equipment.
REC Singapore and RECWafer
The solar module prices for REC Singapore and wafer prices for
RECWafer are estimated based on a selection of external sources.
However, the estimates from different sources vary considerably
and do not cover the period of the impairment tests. Experience has
also shown that market demand and prices can change rapidly and
significantly and prices are also dependent on government
incentives. Sales prices for solar modules and wafers have dropped
considerably, starting in 2009. Over time, the wafer sales prices are
expected to follow somewhat the same price curve/development as
for solar modules.
REC Singapore
REC expects continuous price reductions for solar modules from
2012. Assuming continued oversupply, REC believes that module
prices will be predominantly cost driven, although some price
variations are seen in the market between “branded” an “non
branded” players. This view is in line with external views. The
contract portfolio creates a customer basis, but as these are
framework contracts the prices will depend upon the current
market price for the relevant period.
Due to the current market over supply, prices in 2011 have declined
belowmany producers’ production cost. Mid-term this situation is
expected to stabilize during 2013 and therefore prices are believed
to level out more. Long term, prices are expected to decline year-
on-year, but at a slower pace towards the end of the period. This is
what one would expect as prices approaches grid parity.
Estimated conversion cost improvements included in the impairment
test are built on the performance improvements observed, expected
scale advantages and detailed action plans for the first years. The
significant sales price decreases are also expected to decrease costs
of input, includingmaintenance capital expenditure.
RECSingapore’s production volumes are expected to increase
somewhat compared to 2011 through process improvements. The
business plan includes some capital expenditure programs that
increase performance that are excluded for these impairment tests.
The financial implications of excluding these items, in addition to
lower capital expenditure, are decreased volumes available for sale.
Thismeans lower sales volume and lower margins (lower efficiency,
less economies of scale) compared to the business plan assumptions.
Maintaining the existing assets is expected to require less capital
expenditure than the original investments. REC Singapore’s current
technology is new and required a premium price and was made at a
time of high capacity utilization by the capex vendors making them
able to charge high prices. As the profitability of the solar industry
falls, the industry is likely to pass on some of this burden to its
suppliers. There will also be shift from suppliers in Europe to Asia. In
Singapore REC invested in infrastructure of a size that can be
utilized to serve more plants than REC currently has invested in, and
this has made the investment higher than needed for the current
plants. From2016 it is assumed a reinvestment rate on machinery
and equipment of half of the original investments. Technical
infrastructure is expected to be reinvested at 100 percent and the
buildings are not expected to be reinvested.
For REC Singapore an impairment charge was recognized at year-
end 2011. Therefore, any unfavorable change in any key assumption
would cause the estimated recoverable amounts to decline further
below carrying value. The estimated value in use is very sensitive to
changes in key assumptions. Based on the assumptions used in the
2011 impairment tests, one Euro-cent reduction per watt to
module prices or one Euro-cent increase in total cash costs for all
years would increase impairment by approximately NOK 700
million. An increase in polysilicon price by one USD is estimated to
have an effect of approximately NOK 200million. An increase in
annual capital expenditure by NOK 15million is estimated to have
an effect of approximately NOK 150million. An increase in post-tax
discount rate by one percentage point is estimated to have an
effect of approximately NOK 400million. These estimates are
based on the 2011 impairment tests, and are translated to NOK
using 2011 year-end exchange rate.