Shares of China's LDK Solar (NYSE: LDK [1]) rose almost 5 percent today on word it intends to start making its own polysilicon.

The maker of silicon wafers, the raw material of most solar cells, signed a contract to purchase polysilicon production equipment from U.S.-based GT Solar.

LDK is to purchase polysilicon reactors and other equipment from GT and install it at its facilities in Xinyu City, China, with the intent of producing silicon feedstock for its multicrystalline solar wafers.

LDK expects it will be able to create up to 6,000 metric tons of silicon in 2008 and 15,000 metric tons in 2009.

The company has supply agreements for all the polysilicon it forecasts needing for 2007, although pricing has not been fully set.

"In combination with our ability to use recyclable polysilicon in our production process, producing our own pure polysilicon feedstock will enhance our cost efficiencies," said Xiaofeng Peng, Chairman and CEO.

CIBC World Markets analyst Adam Hinkley said the move made sense.

"By integrating upstream into poly manufacturing, LDK is securing its market position and lowering its cost base, adding confidence to our SO rating ... we believe upstream integration will help insulate LDK longer term."

Continued polysilicon shortages and 18-to-24-month lead times for ingot/wafer equipment are expected to assure LDK of attractive margins in the near term.

Some analysts believe silicon wafers will decline to be a 20 percent margin business long term—which is better than the margins forecasted for solar cell and module makers.

Continued polysilicon cost reductions will be necessary, said CIBC's Hinkley, given the aggressive economics of new wafer producers soon to come online.

"We have been modeling for LDK's average poly cost to be ~$130/kg exiting 2008. New polysilicon entrants will have a higher production cost than the established tier-1 manufacturers, but even a conservative production cost estimate for new entrants is $50-60/kg, or 50-60 percent lower than current levels," he said.

LDK sells its wafers globally to makes of photovoltaic products, including solar cells and solar modules. Its headquarters and manufacturing are located Xinyu City, in China's Jiangxi province. It also has a U.S. office in Sunnyvale, California.

More and more solar suppliers should be expected to verticalize, analysts said.

"We expect continued vertical integration along the solar value chain in order to fend off the pending commoditization of the industry," said analyst Jeff Osborne of Thomas Weisel Partners.

"We would expect many solar cell producers to attempt to partner or merge with ingot and wafer players over the coming quarters."

LDK closed the day at $40.57, up 4.56 percent, or $1.77.

At about 18 times analysts' estimated 2008 earnings-per-share, LDK currently trades at a premium to other Chinese solar peers.