A lot of cross currents in the solar patch the past week; to reiterate I like the sector in terms of long term growth (US and China have yet to begin to scratch the surface of ultimate demand) but find investing in the sector a high risk game akin to gambling. Most of these stocks are populated by day trading types whose holding period is akin to... well, I suppose HAL9000. They are scary to short as well, because at any moment if oil pops the solar stocks can jump 15% in a session.

I called for a major purge in the group a few years back [Jan 3, 2008: The Long Term in Solar] as far too much capacity has come online and would prefer to see this space consolidated down to a handful of industry giants. Then it should become easier to invest in.

Speaking of glut, according to Digitimes, there is a potential that half of existing solar manufacturers might be gone by the end of 2010. That would actually be a good step for the long term in my eyes.

  • As many as 50% of the more than 200 solar manufacturers, mired in red ink with current selling prices above US$2.00 per watt, may not survive, The Information Network stated.
  • The market research firm recently noted massive inventory buildup and huge overcapacity were having a serious impact on the solar panel industry and manufacturers, and Dr. Robert Castellano, president of The Information Network has now pointed out that inventory is averaging 122 days in 2009 versus 71 days in 2008. Capacity utilization dropped to 27.9% in 2009 from 48.0% in 2008.

Those are some scary numbers. Capacity continues to increase because Chinese entrants continue to be born.

  • A key reason is increased supply from China, which added an additional 1GW of capacity.
  • The price per watt has now dropped to US$1.80 for polysilicon-based products, which is lower than the US$1.85 level The Information Network previously thought the industry would see at the end of 2009. By way of comparison, the average selling price in the third quarter of 2008 was US$4.05 per watt.

So naturally when a supply glut happens what do you do? Throw out the economics playbook - you build even more.

  • The Information Network doesn't expect other industry players to back down from increased competition from China. Other makers are expected to increase their capacities despite the low utilization rates in order to reach economies of scale and better compete against the Chinese. The market research firm expects the industry to see a 25.7% capacity utilization rate and 133 days inventory in 2010.

This is the war to the bottom; many casualties will be taken.

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Speaking of additional capacity ....

First Solar (FSLR) put on a large reversal yesterday after it was announced that the world's largest solar field would be located in China. But not to worry, the US shall be the leader in green energy jobs. Considering this is a 10 YEAR project it is bemusing to watch the market valuation change 10% in hours but that's the market for you nowadays - trade the momo on the news.

Let me say, I LOVE this idea by the Chinese and have proposed the US do the same thing in the desert's of Arizona, Nevada, wherever we have 300+ days of sunlight. Goldman Sachs also agrees with me as they have been quietly snapping up land in those areas awaiting the day this happens (on a much smaller scale of course). If we're going to take hundreds of billions from the future to stimulate today, this was the sort of project that would of actually had a long term benefit. But as always we are REACTIVE rather than PROACTIVE - unlike our global competition.

  • First Solar Inc. said Tuesday it has received initial approval from the Chinese government to build what may become the largest solar field in the world.
  • First Solar, which makes more solar cells than any other company, said it struck a tentative 10-year deal to build in China's vast desert north of the Great Wall. The project would eventually blanket 25 square miles (64 sq. kilometers) of Inner Mongolia -- slightly larger than the size of Manhattan -- with a sea of black, light-absorbing glass.
  • The solar field would dwarf anything in operation in the U.S. or Europe. At 2 gigawatts, or 2 billion watts, the solar plant could pump as much energy onto China's grid as two coal-fired plants, enough to light up three million homes.
  • The potential is enormous for projects like this in China, CEO Mike Ahearn told The Associated Press before the announcement. The Chinese government is further along in its thinking about solar than we've imagined.

It's not just solar Mr. Ahearn... remember, China plans for the century ahead.

  • Ahearn said a system like this would cost $5 billion to $6 billion if it were built in the U.S., though it likely would be cheaper using lower-cost Chinese labor.

So this would of been about 7% of the recently passed pork barrel stimulus; and covered just under 3% of the US housholds (about 110 million). In other comparisons, it's about 1/3rd of the 1st time home buyer program credit (we spent $16B there). Or a tad more than Cash for Clunkers. ($4B)

Why not in the US? Ah...

  • Ahearn said it would be nearly impossible to install a solar field of this size in the United States. There's plenty of land, but there's not enough near transmission lines, Ahearn said. And efforts to build new power lines are regularly stymied by competing interests from government agencies, environmental groups and disgruntled residents.

Oh well, maybe in a few decades.

Unfortunately it seems yet another American has turned to an advocate of 'socialism' -- it's funny how profits makes capitalists change their tune so quickly ;)

  • There's an advantage to planning this from the top, Ahearn said. The speed and execution advantage is in China.

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So with all that solar supply still coming online, obviously near term demand recovering would be helpful. Suntech Power (STP) says that has begun but showing another issue with this sector; it is so dependent on decisions by governments in terms of incentive programs; in this case - Germany, which has about a decade head start on the U.S. in solar. But again not to worry - I've been promised we'll lead the world in green energy jobs. (source: many politicians)

  • Global demand for solar power has improved substantially in the last month, led by top solar market Germany, Suntech Power Holding Co Ltd Chief Strategy Officer Steven Chan said on Tuesday.
  • Maybe about a month ago the markets were still slower than we would have liked, but as of the past month -- and this has been led principally by Germany -- we have seen the market pick up, Chan said at the Reuters Global Climate and Alternative Energy Summit in San Francisco.
  • Like other solar companies, Suntech has been hurt by a dearth of financing for new renewable energy projects. That lack of funding, as well as a pullback in solar incentives in Spain, has led to a glut of solar panels in the market and a dramatic drop in their prices.
  • That precipitous fall in prices has recently caused German solar companies Conergy AG and Solarworld AG to voice objections to the pricing practices of Chinese panel makers who undercut their German peers.
  • We're clearly not dumping, Chan said, pointing to the company's gross margin of nearly 19 percent in the second quarter. He said the company's margins in the third quarter would be roughly the same, and called the German controversy over Chinese panel makers' prices self serving.
  • If they're a German company, they should be able to say 'Okay, we're going to manufacture 100 percent in Germany' and not, you know, '50, 70 percent of our manufacturing is in Malaysia,' Chan said. 'And now we're claiming that we're a German company that is being oppressed by a Chinese company.' It seems a little bit self-serving.

Ooohh, testy testy.

Suntech still sees hope in the US... down the road.

  • To capture that (US) growth, Suntech is planning to lease or buy a facility to produce its solar panels in the United States. The company has narrowed its location choices for that facility to Phoenix or various cities in Texas, Chan said.
  • The company aims to start production at the planned 50 MW facility by the third quarter of next year. It would employ about 150 workers, Chan said. Suntech may choose to expand that facility, or open other ones close to areas where demand for its products is greatest.

Personally I think opening up a US facility is basically a trophy so that they can differentiate with made in USA panels, in a commodity business. Note the whopping 150 employees and 50 MW facility. Meanwhile 98% of their panels will be made in China ... not that this is a self serving move. (ahem)

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[Mar 14, 2009: NYT: Europe's Way of Encouraging Solar Power Arrives in U.S.]

[Feb 6, 2009: NYT - Dark Days for Green Energy]

[May 30, 2008: German Solar Subsidies to be Cut Less than Feared]

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