Thursday, January 3, 2008

The Long Term in Solar

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Let me preface this post by saying I am a long term bull on solar, and in fact was an 'early adopter' among the investor class, that is I was invested over a year ago in my personal account. So I am not a Johnnie Come lately to this area. With that said, I do have some serious concerns in the 'mid term' (1-4 years)... my thesis is like all mfg goods, especially now heavily based in China, we will have periods of time over the next decade where capacity does not match demand, and even if this holds for a 4-6 quarter period, serious price wars can develop. I outlined this theory in detail in November in [Interesting Survey from Chinese Solar Companies - Price Concerns Already an Issue] In fact Jeffries analyst even thinks this is going to start happening next year [More Concerns about Solar ASP Pricing]. It is not a matter of if, it's just a matter of when ... but "when" is the key to investing in this space. (one can make a lot of money, before having to face the music)

In times like this when speculative juices are flowing in the sector, and even the tiniest of companies get run up 100s of percent it is hard to reconcile these performances with long term logic. The market in the near term is anything but logical. We will have some great shakeouts and many of these no name companies rising 400% I expect to be delisted, acquired for pennies on the dollar in half a decade or just be gone. Hence why I remain focused on the leaders such as Suntech Power (STP). But that does not mean between now and then they cannot rise another 1000% before the market comes to its senses. It won't be the first time a sector has this sort of action, nor the last.

The reason for this post, is to point out an excellent blog post [PV Industry Oversupply in 2008] who writes in even greater detail the same thoughts I espoused above and for anyone either in the sector or interested in it, I'd highly encourage a read. In 1 paragraph I'd summarize as below:

Bottom line: by the end of this year, 2008, cell producers will have installed capacity of 12.2 GW annual production according to present manufacturer plans. When you add in solar thermal capacity (Ausra, Schott) that number grows to 12.9 GW. Looking ahead, the 2009 end-year production capacity is simply enormous, at 17.2 GW. Is this a problem? Oh, yes, when you look at the demand estimates. Match the year-end 2008 capacity of 12.2GW with 2009 demand: the EPIA optimistic (”policy-driven”) estimate of 2009 world-wide demand is 4.3GW. Lehman calls it 4.8GW. Merrill Lynch has 5.2GW. A Q-cells presentation referred to a UBS number of 8GW. Even if you de-rate the 12.2GW number to account for “actual” vs. “nameplate” capacity; even if you attempt to adjust for “press-release” vs. “actually built” capacity, the numbers are still very out of balance. Even the most optimistic 2009 demand guesses fall far short of what the industry intends to produce.

Aside from the article itself the sheer capacity of solar panel makers emerging as shown in this entry [PV Supply/Demand data] should alarm you to at least some degree. Just imagine, each of these want to be a Suntech Power or at least a Trina Solar (TSL) in a few years. And for each on the list, I am sure there is another capitalist in China forming a new one to break ground in the next 6-12 months. This will shake out much like the semiconductor industry and in the long run I believe there will be 5-7 major giants who will be quite profitable companies. But where does that leave the other 50-70-90 (and more coming each quarter online?)

Now as I always repeat in these posts about solar, the counter argument is always, solar is 0.000001% of all energy use and will explode over the coming decades. I don't dispute that. My argument is timing. Timing of supply vs demand. It would only take 4-8 quarters where demand and supply are misaligned (way too much supply vs current demand) and this would crush pricing.... many companies will go from printing money to being major losers.

Now I don't know if (latter) 2008 will be the time of the great 'shake out', but this is something to keep on the radar and with the clarity of the post I wanted to highlight it to readers of this blog as well. He essentially explained what I did in my post above in much greater detail and with an Excel sheet full of companies in the supply chain. Worth the time so you see both sides of the story. Until then, enjoy your DSTI's and ASTI's of the world... ;)

Long Suntech Power, Trina Solar in fund; long both in personal account

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