By Angelo Zino, Clyde Montevirgen
The year 2010 was strong for the solar industry, as profits increased substantially. While we see some hurdles early 2011 as subsidy reductions take effect, we expect demand to strengthen in the second half, as smaller markets look to further establish a solar footprint. Overall, for 2011, we see a mixed picture, with healthy sales growth but declining profitability for some. We list our predictions for the industry for 2011 below.
1. We forecast that global solar system installations will increase at least 20% in 2011, well below our 2010 projected growth rate for a twofold increase. We see demand slowing in the first half of 2011, as customers refrain from purchases following modest government subsidy reductions within important solar markets, such as Germany. However, we expect solar manufacturers to respond by lowering selling prices to enhance project returns, which should stimulate further demand for solar products. That said, should Germany move forward and schedule a mid-year feed-in-tariff reduction, we think it is likely that a pull-in of orders could once again occur during the second quarter in the largest solar market.
2. We project global solar cell capacity to increase 39% to 23.8 GW in 2011 from our 17.1 GW forecast for 2010. Recently, we believe solar manufacturers have been running plants at almost full capacity and some have even resorted to outsourcing components in order to fill customer orders. We think the industry will continue to add manufacturing plants and production lines at a brisk pace, as existing panel makers look to take advantage of scale benefits. We also expect large companies, which compete in non-panel producing segments of the solar supply chain, to expand vertically, and we think they will enter the panel manufacturing business.
3. We believe that solar panel prices will continue to fall in 2011. We currently estimate that average selling prices for solar panels will drop about 15% in 2011 versus 2010, with the substantial portion of the decline occurring in the first half of the year. We think competitors will continue to leverage cost structures through increasing scale and improving operating efficiencies. We think an additional downward adjustment in panel prices could occur around mid-year depending on whether and by how much the German government cuts incentives within its region. However, we note that our anticipated pricing drop is not as steep as that witnessed since late 2008.
4. Although prices for polysilicon (the primary raw material used to make a solar module) rose in 2010, we expect prices to be on a downward trend in 2011. The price of polysilicon actually witnessed a sharp rebound in the second half of 2010, given tight supply of the raw material. This was caused not only by the robust solar demand environment, but also by rising demand for wafers from the semiconductor industry. However, we estimate the average price of polysilicon will end 2011 at around US$60 per kilogram, down about 20% from US$72 per kilogram, the spot market price at the end of 2010, according to PV Insights. Despite our projection of increasing demand for solar and semiconductor wafers, we expect a notable amount of supply to enter the market, putting downward pressure on prices.
5. We believe that China-based solar companies will continue to take market share from most U.S. and European competitors. Backed by local bank debt, Chinese manufacturers expanded production and cut unit costs in 2010, allowing them to offer panels at lower costs and gain market share. We expect this trend to continue, and we see China-based solar companies having more than 50% of the world¡¯s total cell capacity by the end of 2011. We believe that non-Asia-based companies will start focusing more on non-production segments of the supply chain, such as project development and installations, in order to preserve profitability. Additionally, we expect Western manufacturers to start opening production facilities in China so that they can not only benefit from lower cost production, but also gain access to the country¡¯s growing solar demand. One U.S.-based solar manufacturer that we think could find itself gaining share in the upcoming year is industry leader First Solar, as it expands stated capacity by about 50% and benefits from a strong pipeline of projects in the United States.
6. We believe the companies that can best diversify away from Germany, the largest solar market, will experience the most success over the next 12 months. We estimate that Germany represented nearly 50% of total solar unit installations in 2010, with growth of about 150% from 2009 levels. However, we forecast a 15% decline for this region in 2011, and, as a result, we expect this market to comprise only about 35% of total unit installations. We think expansion into the following future solar growth regions will be key: Italy, Asia, the Middle East, Africa, and, of course, the United States. We believe that China-based solar makers, as well as First Solar, will be able to do a better job diversifying away from Germany than Europe-based counterparts.
7. We think the industry¡¯s solar panel costs will fall approximately 13% in 2011. China-based panel makers have benefitted from lower polysilicon prices and were able to substantially reduce their costs on a per megawatt basis to about US$1.28 in 2010, based on our estimates. Although we do not see a dramatic reduction in polysilicon prices ahead, we believe that benefits from vertical integration and operating leverage will lead to lower average panel costs of about US$1.12 by the end of 2011. In addition, we see a greater percentage of the world¡¯s solar cell and panel manufacturing shifting to Asia, where we think industry players are capable of reducing the cost per watt at a more dramatic pace.
8. We believe the industry¡¯s profitability will decline in 2011. We expect panel selling prices to fall faster than costs, and we see gross margins decreasing on average, from the mid-20% range in 2010 to the low-20% area in 2011, for many China-based solar makers. Operating expenses such as research and development costs should rise as competitors look to improve conversion efficiency rates and expand global sales forces. Overall, we think operating margins will contract from the mid-teens to the low teens over the same period. However, we believe some companies, such as LDK Solar Co., Ltd., will improve their margin profile through vertical integration.
9. We anticipate that the industry¡¯s high financial risk will persist in 2011. We expect debt levels to continue to rise, as China-based solar makers expand production capacity and extend global sales exposure. Assuming higher sales and a modest decrease in margins, we think the industry¡¯s debt to equity ratio will remain at about 80%. We also anticipate that most manufacturers will continue to devote cash flow generated from operations toward expansion rather than strengthening their balance sheets. We believe that the incremental cost of capital required to increase polysilicon/ wafer capacity is significantly greater than that of an equal amount of module or cell capacity.
10. We expect solar manufacturers that have a greater proportion of sales devoted to the United States to outperform peers. We estimate that the United States will experience at least a 60% rise in unit installations, far greater than our 20% forecast for the industry overall. We attribute this mostly to robust utility and commercially driven projects, as companies transition to renewable sources of electricity, given favorable incentives and more attractive prices. We expect Advanced Energy Industries, a semiconductor equipment maker that is also aggressively expanding in the solar inverter market, to be a major beneficiary of this trend. We believe Advanced Energy Industries will generate nearly 80% of its solar-related inverter sales from the North America market.
Angelo Zino has been an analyst at Standard & Poor¡¯s (www2.standardandpoors.com) since 2007. He analyzes, researches and recommends equity investments within the semiconductor equipment and solar industries. Previously, Zino was a Vice President and Portfolio Manager at North Fork Bank, investing accounts through the utilization of mutual funds and applying a black-box approach. Prior to that, he was an analyst for the North Fork Bank Trust Department; recommending industrial stocks through fundamental analysis and technical analysis driven models. Zino received an MBA in Finance from Hofstra University. He is a member of the CFA Institute and the New York Society of Security Analysts (NYSSA) and also holds the Chartered Financial Analyst (CFA) designation.
Clyde Montevirgen joined Standard & Poor¡¯s U.S. Equity Research in March 2006. Montevirgen is currently an analyst in the Information Technology group. He primarily covers semiconductor and solar companies. Prior to joining S&P¡¯s, Montevirgen worked at Applied Materials, Solectron, and Asyst Technologies in various supply chain positions. Montevirgen received a B.A. with a focus on operations management and supply chain management from California State University, Hayward. He also earned an MBA in Finance from the Mendoza School of Business at the University of Notre Dame.
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