What Does 2013 Have In Store For The Solar Sector?

Last year was a challenging year, to say the least, for the solar sector. The chronic oversupply of solar panels caused prices to decline sharply through the year, eroding profit margins across the industry. Demand in key markets like Europe also remained subdued owing to the weak economy and a scaling back of government incentives. This prompted solar firms to scout around for opportunities in new and under-penetrated solar markets to drive volume growth. The gloomy market conditions also saw governments standing up to protect their domestic solar industries from low cost imports, resulting in a trade war of sorts in the international solar market. Here we provide a brief overview of some of the important trends that influenced solar companies in 2012 and how they are likely to impact these firms in 2013.

Panel Prices

Outlook For Panel Prices: Panel prices declined by as much as 30% through 2012 due to excess inventory available in the market and a decline in manufacturing costs. We believe that prices could extend their decline into 2013 as well given the huge supply-demand imbalance in the industry (global demand is estimated to be around 30 GW while Chinese manufacturing capacity alone is around 50 GW). However, if there are mergers and acquisitions or additional bankruptcies within the industry, we could see fewer, larger solar firms with better pricing power.

The solar market has become increasingly commoditized and a key differentiating factor is likely to be technology. Manufacturers like SunPower (NASDAQ: SPWR), which offer high efficiency modules, will be able to charge premium prices for their products.

Narrowing Gap Between Thin-Film And Silicon Based Panels: The price difference between thin film modules and polycrystalline panels continues to narrow due to stiff competition among Chinese polycrystalline panel manufacturers and declining prices of polysilicon, a key raw material used to manufacture polycrystalline panels. The selling prices for polycrystalline modules has declined by over 30% to under 0.8 euro ($1.05) in Germany while prices for Cadmium Telluride based thin-film panels has declined around 20% to 0.6 euro ($0.79). In markets like China, the prices of silicon-based panels are almost at par with thin-film panels. (PV Module Price Index, PV Magazine) If polycrystalline panel prices continue to fall, thin-film panel manufacturers  like First Solar (NASDAQ: FSLR) will find it increasingly difficult to sell their lower efficiency panels to the rooftop market.

Emerging Markets for Solar Power

Europe has been a driving force in the global solar sector, thanks to generous government subsidies which have helped boost solar installations. In 2011, the region accounted for almost two-thirds of new global solar installations (totaling around 18.5 GW). However, the market has witnessed setbacks due to the sovereign debt crisis and a scaling back of subsidies in markets like Germany and Spain. In response to weaker demand, solar firms began scaling back on European operations. For instance, First Solar, the world’s largest thin-film manufacturer, announced plans to close its German manufacturing operations.

This year we are likely to see solar firms focus on sustainable solar markets where solar power is able to compete with traditional sources of electricity without banking heavily on subsidies. These regions include India, South Africa, and the Middle East where sunshine is abundant and electricity prices are relatively high, allowing solar power to reach grid parity sooner. Demand from these markets tends to be more stable and face fewer regulatory risks. Other markets that offer promise include Japan, where the government is planning to phase out nuclear power. The Japanese government is providing feed-in-tariffs, which are among the highest in the world, to promote solar power installations. China is also likely to see growth in demand for solar panels as the country has been boosting subsidies to meet its goal of 21 GW of installed capacity by 2015.

Consolidation

The past year has seen over 100 solar companies exit the industry, and we are likely to see more failures this year given the excess capacity, steep price cuts and negative margins that have taken a toll on balance sheets across the industry. The Chinese solar industry in particular looks ripe for consolidation as it holds as much as 50 GW of annual manufacturing capacity. The Chinese government is also likely to support the buyout of smaller, weaker firms by larger players. Earlier in December 2012, the government took a tough stand on failing solar firms, indicating that it would stop providing financial support and would also prevent  provincial governments from doing so. (See Also: Who Are The Potential Winners And Losers As China Pushes For Solar Reforms?) Among the Chinese solar firms that we cover, we believe that Yingli Green Energy (NYSE:YGE) and Trina Solar (NYSE:TSL) are in a relatively good position to acquire weaker firms thanks to their large scale and comparatively strong financial position.

Trade Barriers

The weak industry conditions saw governments in Europe and North America standing up to protect their domestic solar industries from cheap Chinese imports. Late last year, the U.S. government completed its investigation into the import of Chinese solar products, imposing anti-dumping and countervailing duties of between 24% and 250% on Chinese solar products. (See Also: US Finalizes Tariffs On Chinese Solar Firms, But Benefits For American Firms Dubious) While these tariffs are quite high, they apply only to modules that house solar cells manufactured in China, leaving a potential loophole that would allow Chinese firms to source their cells from abroad and circumvent tariffs.

Last September, the European Union also initiated an  investigation into Chinese solar imports in what is seen as the largest anti-dumping probe ever carried out by the Union. (See: Suntech Power Faces The Heat From EU Anti-Dumping Investigation) The investigation is likely to be completed by the end of this year. An imposition of duties is likely to have severe consequences for Chinese firms given that Europe is the largest market for the Chinese solar industry. In 2011, Europe accounted for 80% (around $26 billion) of Chinese solar exports .

In retaliation, the Chinese government launched investigations into dumping of polysilicon into the Chinese market by U.S. and European manufacturers. Although China has been building domestic polysilicon manufacturing capacity, the local product is still lacking in terms of quality and many panel manufacturers such as Yingli Green Energy continue to rely on imports. Any potential tariffs on polysilicon imports could drive up the cost base and impact the profitability of these companies.

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