Saturday, December 20, 2008

BusinessWeek: Clouds Over the Solar Industry

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Unfortunately, the shakeout that I theorized would happen in the solar field is appearing to happen much earlier than I anticipated [Jan 3: The Long Term in Solar] due to credit crunch and global economic slowdown/recession. A lot of failures and consolidation should occur - keep in mind for every 1 Chinese solar stock trading on an exchange, about 9 (last I checked) are private in either Hong Kong or China. With capital intensive process and capital intensive needs of customer for projects it's not the greatest of times as BusinessWeek points out. Looking at the stocks, they have simply not reacted at all in this rally except for 1-2 days, and most charts look poor despite probably the best candidate to make their case, outside of Al Gore to make to ascend to the Presidency.

I still expect Obama pops in 2009 as energy policy initiatives are announced (and you know how the lemmings in this market react to "thesis") but unfortunately a lot of solar investing in the next few quarters will be on hopes - the headwinds look quite tremendous. I'm actually quite bullish on the macro sector as a growth industry (still), but the individual companies face serious challenges. The next 4-6 quarters should be very interesting. With potentially new technologies coming online 3+ years out the intersection of timelines will also be interesting.

We still have 3 names in smaller positions, all of which I was hoping to exit on any Obama pop - so far Midas has not touched these stocks.
  • If the recent five-year boom in solar energy marked the birth of a global industry, the next half-decade should be its coming of age. But like most adolescents, solar is experiencing growing pains. The economic crisis has weakened demand for everything from polysilicon to rooftop panels, just as manufacturers have spent billions expanding production. The overcapacity has caused prices to plummet and left the industry financially exposed. A number of companies—especially startups—may not survive a shakeout that could last 18 months or longer.
  • The causes of the downturn are complex and interrelated. As the price of oil plunged from its peak last summer, solar and other forms of renewable energy became relatively less cost-competitive—dampening demand from industrial, commercial, and residential customers. At the same time, the credit squeeze has made it harder for customers, whether power companies or energy-conscious homeowners, to finance solar projects. Some also are holding back in anticipation that solar equipment prices will fall even further.
  • Consider the story of Peng Xiaofeng, chairman of China's LDK Solar (LDK), a maker of solar wafers. During a recent trip to Europe, he toured major solar projects that have been, in some cases, on the drawing boards for two to three years. "They're all delayed," Peng says."I don't think they'll be ready [even] in 2010 or 2011."
  • After increasing at roughly 50% annually every year since 2004, the overall market for new solar installations could slow to just 15% growth in 2009, according to analyst estimates. Retail prices for photovoltaic (PV) panels may fall by as much as one-third in 2009 because of a continued glut. Adding to the gloom: Spain and Germany, the world's top two markets for PV panels, have recently trimmed the subsidies they offered to jump-start local industries. "We're moving from a seller's to a buyer's market," says Adel El Gammal, secretary general of the European Photovoltaic Industry Assn. (EPIA).
  • The Claymore/MAC Global Solar Energy Index (TAN) has dropped 71% since its launch on Apr. 15 this year, and some leading companies have fared even worse.
  • Despite this carnage, industry observers remain bullish on solar's longer-term prospects. As the price of panels drops in the next 12 to 18 months, solar power will become more attractive compared with other forms of energy. Consolidation among companies in the industry—especially as weaker players drop out or get acquired—also should lower costs and improve profitability.
  • All told, figures energy consultancy Navigants (NCI), the total amount of electricity produced worldwide via solar should soar from 3 gigawatts this year to 15 GW in 2012, the equivalent of 19 coal-fired power plants. (amazing how small it is when you consider it in those terms)
  • Savvy investors are focusing most of their attention on two regions of the world, Europe and Asia. Sure, the U.S. spearheaded solar heating back in the 1970s and could see a new investment push during the Obama Administration, but over recent years it has been Europeans and Asians, particularly in Germany and China, who have led the pack in new technology, fast-growing startups, and increasing use of solar-generated electricity.
  • Germany alone will account for 38% of market demand for solar power equipment this year, while Western Europe as a whole constitutes three-quarters of the market. By comparison, China represents 11% of the market, and the U.S. 9%. (Drill baby drill!)
  • The problems begin with polysilicon, the raw material from which solar cells are made and that accounts for four-fifths of the cost of a solar module. When the solar boom began in 2004, polysilicon suppliers couldn't keep up with skyrocketing demand. To satisfy customers and cash in on surging prices—which reached $450 per kilogram on the spot market early this year—suppliers laid ambitious plans to boost output capacity. But with so many piling in at once, suppliers overshot the market, especially after demand softened for solar panels. Polysilicon prices now have fallen below $200 per kg and could drop to $120 per kg by the end of 2009.
  • The capacity mismatch won't be fixed anytime soon. Thanks to plants already set to come online, output of polysilicon will double next year, even as production of the solar cells that use it grows by a more modest 34%. And according to market researcher iSuppli, overall polysilicon capacity is set to reach 430,000 metric tons by 2011, up from just 53,500 metric tons at the end of 2007. (we called for this overproduction but assumed growth would still be going strong into 2009 to match supply - but anything China can overbuild; they will - polysilicon plants generally takes 2 years to get up and running at full capacity; the avalanche shall commence soon) Plunging prices and profit margins have put enormous pressure on new suppliers such as China's GCL Silicon Technology. GCL expects to have 24,000 metric tons of annual polysilicon capacity by the end of 2010 compared to a 3,000-metric-ton capacity in 2008. That would make GCL one of the world's largest producers.
  • Yet as global demand for PV panels has slackened, GCL Chief Executive Officer Hunter Jiang says his predominantly Chinese clients want to renegotiate their long-term polysilicon contracts to mirror the declines in the spot market. In particular, China's SunTech (STP) is trying to rework its contracts with suppliers to help offset the slump in demand next year.
  • The tough environment also extends to companies further down the supply chain, such as makers of solar modules and wafers—the halfway point between raw polysilicon and finished PV panels. According to analyst Henning Wicht of iSuppli, these players are facing increased competition as profit-starved polysilicon suppliers try to move into the higher value-added module and wafer business.
  • One trying to ride out the storm is SolarFun (SOLF) in Qidong, Jianjsu Province. When times were good, the company had expected to produce 175 megawatts to 190 megawatts of PV cells and modules this year. It also planned to add four cell production lines in 2009 after inking a new three-year supply contract with Germany's Q-Cells. But on Dec. 2, SolarFun reduced its 2008 production target to around or below 175 MW. The expansion plans? Shelved for now.
  • The problems aren't limited to new entrants. Q-Cells cut its forecast for yearend sales on Dec. 9 because of weakening market demand linked to the current financial crisis. According to the company, roughly 40 to 50 of its 80, predominantly Chinese, customers have postponed orders
  • The jump in financing costs also is hitting the last step of the solar supply chain: End consumers who now can't afford to expand capacity.
  • ...it increasingly pays to be big. Q-Cells, SunTech, and other heavy hitters may be cutting back, but they still have the financial muscle to survive, while many independent firms could go under. Analysts reckon the industry is set for a round of bloodletting in the next 18 months
Long LDK Solar in fund; no personal position

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