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How is PV industry reacting to oversupply conditions?

July 27, 2009

How is the global PV industry reacting to oversupply conditions? Dr. Henning Wicht — Senior Director and Principal Analyst, iSuppli Corp., and Stefan de Haan — Senior Analyst, Photovoltaics, iSuppli, have attempted to answer a whole lot of questions and provided an outlook on the global solar photovoltaics industry.

Propelled by exaggerated growth expectations in the past and further boosted by weakening demand due to the global economic downturn, the PV industry has blundered into a situation of critical oversupply becoming evident on all nodes of the solar value chain.

According to Dr. Wicht, last October, all prices of wafers and modules were up, and nobody had foreseen a dramatic drop. It happened indeed, because many people believed in the industry consensus.

Recent findings — June 09
1. Polysilicon supply will enforce further price drops in 2010
2. You will see mounting inventories – due to mounting inventories, module production in 2009 will be ~25 percent smaller than expected.
3, Module price decline will continue, but 2009 is slower already
4. Global PV installations, though in good shape, wont exceed 4GW in 2009.

PV market update — key findings
Polysilicon
– Oversupply situation is getting worse
– Significant price drops expected through 2010: $40/kg or less
– Winners will be determined by cost structures

Modules
– Inventory levels climb to three times that of Q2-2008
– Production cuts and review of business model in 2009
– Prices continue to drop, but decline will slow down at the end of 2009: $2.2-2.3/W end 2009

PV system demand
– Global installations 2009: 4GW to be installed this year
– Revenue decline of 35 percent compared to 2008 — since we have a price decline and volume decline

The solar industry will continue to change, said Dr. Wicht. “Oversupply situation is not the end of the industry. It will pass relatively soon. Suppliers and supplier structures will change. Once dynamics change, the prices will change as well.”

Polysilicon prices
According to Stefan de Haan, polysilicon price peaked in 2008. Due to the changing dynamics of supply and demand, we forecast prices will drop significantly soon after 2008. What we see today is indeed this picture. Prices have dropped even further down. Spot prices are in the range of $70-90 per kilogram. It is likely to continue.

“We also forecasted on the price. Demand will settle in somewhere at the 3GW range for crystalline modules. At that level, you’ll have suppliers at $2.5, $2.8 per W.”

So, the scenario is: price is likely to be in the $2.5 per W range for crystalline modules in 2009. What we see now in the market is that prices are already at $2.7 per W. Q-Cells, for instance, had warned on July 14 that Q2 was not as good as they had expected in Q1.

Market in next 12-14 months
Toucing on the PV market update, Stefan de Haan said: “What iSuppli’s model had predicted last year has now become reality. The PV markets shifted from supply-constrained to demand-constrained — and that’s a fact — in 2009. Companies were forced to react to oversupply situation. There were severe production cuts and unutilized capacity.”

These effects are reflected in iSuppli’s models.
* Rreal production’ vs. ‘production roadmap’
* Key element to anticipate short-term strategy changes
* Inventory level analysis

As the mismatch of demand and supply is worsening, so companies are forced to react to this. They not only delayed or cancelled their long term expansion plans, but also significantly reduced their current capacity utilization and really cut back on actual production.

To reflect these strategy shifts in our models, we distinguish between the ‘real production’ vs. ‘production roadmap’.

“The fundamental question we ask is: how likely is that companies will achieve what they plan. If supply and demand become severely disconnected, we also have to consider short-term strategy changes to forecast real production,” he added.

Current production indicates a PV modules oversupply of over 6GW — which will result in $12 billion spent only in building actual module inventory. This number is not possible as the industry will literally go bankrupt with that level of investment.

How much inventory can the industry afford?
The level of 30-50 days of inventories has been standard during Q1-08. Now, in Q4-08, inventories are growing enormously. Only First Solar has managed to maintain a level of less than 30 days inventory (28 days) during Q1-09.

“When you compare First Solar and Solon, the picture becomes really dramatic. When you look at Solon’s inventory amounted to $237mn compared to revenues of $50 million — or 427 days of inventory. Solon was first module producer who dramatically cut back its production. It now disposed of annual capacity of 500MW, but only produced 18MW of modules in Q109,” he said.

Many other module suppliers, very similar to Solon, do not have sufficient resources to invest in further inventory. Their cash flow in Q1 is already negative.

In comparable industries it is a rule of thumb that companies cannot afford to exceed inventory levels by three to four times than what the market needs. If you take 28 days inventory of First Solar, many companies, are approaching 120 days or even exceeding that limit.

For the short term forecast, iSuppli tried to determine how strongly the industry should react to current environment. In the module level, we will still see many decisions to scale back output in next quarter.

Polysilicon demand-supply balance
In 2009, solar polysilicon production will grow to 14GW, up from 6.5GW in 2008. The supply will be more than doubling this year. Crystalline cell production will be growing only moderately, from 5.8GW in 2008 to 7GW in 2009.

The polysilicon shortage has already ended last year. At that time, supply and demand were really balanced. We wil see a polysilicon oversupply of almost 100 percent in 2009.

The polysilicon industry reacts to market changes with less flexibility than cell and module producers. The investments are very high, ramp rates are long, and so, it is not so easy to build up polysilicon production facility. The whole industry is just slow in its movements than other parts of the PV supply chain. Another reason for worsening mismatch is that the silicon consumption per W has also decreased faster than previously expected.

July 2009 — polysilicon price projection
Prices peaked in 2008 — $350-500 per kg. However, it is clear that since Oct. 2008, prices dropped dramatically. In May 2009, spot average was around $100 per kg. Right now, we are already below $80 and the decline will continue.

Regarding the building oversupply, prices will soon drop to production cost levels. That’s how price is built in an oversupply scenario. Companies will do everything to clear their excess production, There will be only room for small margin for best in class producers. In 2010, perhaps, earlier, we may see spot price of $40 per kg.

Module demand-supply balance
Oversupply had already started to build up in 2008. In 2009, 5.8GW of crystalline modules will be produced and 1.7GW of thin film modules will be produced. This gives 7.5GW in total. However, the total installations are 3.9GW, and not more than 4GW. This translates into a module oversupply of about 90 percent this year.

These numbers already include short-term production cuts. They are already heavily discounted. For every module that will be produced in 2009, almost 1 additional module will go into inventory. Companies react to this and adjust their current outputs and long term plans.

Q-Cells slowed down expansion in Malaysia. Sun Power delayed rampup in the Philippines and Malaysia. Moser Baer also delayed its rampup of the new thin film factory.

Stefan de Haan said: “There are many cancellations that are happening now. We will see a decrease in oversupply in the following years. The next three quarters will still be tough for the module suppliers.”

Module price projection
* Total c-Si module production in 2009: 6.79GW
* Total c-Si module demand in 2009: 2.50GW
* Oversupply: 132 percent

* Pure play (module manufacturers) — production 1.37GW, cost $2.41 per W.
* Integrated cell and module manufacturers — production 2.64GW, cost $2.38 per W.
* Integrated wafer, cell and module manufacturers — production 1.60GW, cost $2.16 per W.
* Integrated p-Si wager cell and module manufacturers — production 0.19GW, cost $1.88 per W.

In 2009, c-Si price will reach $2.3 per W. Cost will determine the price. Prices will drop further until the end of this year, but not as rapidly as at Q1.

Last November, iSuppli had predicted that prices will drop from $4 per W to $2.5 per W until the end of 2009. It has now corrected this and expects prices to be $2.3 per W. Production costs have dropped, and hence the reason for this adjustment.

Margins get compressed!
In current environments, margins get compressed along the entire supply chain. Significant price drops have completely eaten up margins of the cell and module producers. Module producers are passing their pressure on. Wafer manufacturers can still maintain very small margins.

“Polysilicon production for incumbent producers is still better, but the situation will worsen in the next year. Winners and losers on module level are not so easy to identify any more, Stefan de Haan added.

When will demand pick up again?
According to Dr, Henning Wicht, total installations in 2009 are expected to be 3.9GW, which is less than 2008, which was 5.5GW. “This installation will again grow in the years ahead. The year-to-year growth will be good, but all of this has to be balanced against supply. We analyzed the regions, which make 80-90 percent of the total installations. The solar industry is changing its mood rapidly.”

Installations in major regions — well, there are no big surprises! The leading regions are: Germany, Italy, Spain, California (USA), France, Greece, Japan, Bulgaria, Czech Republic, and the RoW.

The total capacity in March 2009 was 3,546 MW; which is estimated for June 2009 at 3,922 MW. By 2013, it should be 25,900MW. Also, Italy is probably being stronger than we expected, and Spain is lesser. California is growing faster than expected earlier.

PV installations by market segment
Dr. Wicht said: “Looking at the global annual PV installations by market segment. The market today is dominated by the European countries, mainly Germany. The German market is mainly a rooftop market. We have residential and commercial roofs, which provide 90 percent of the installations in Germany.”

In future, ground installations will pick up. This is mainly due to the US and the potential of China, and the new entrants, who will definitely address this segment, more than the others.

Outlook — short term
In the short term, credits for solar installations remain tight.

* Bankers do not see light at the end of the tunnel.
– Interbank lending is nearly zero.
– Solar installations compete against numerous other investments.

* Despite excellent investment conditions, no installation boom to come.
– Limited cash and credit available.

* Economic downturn has not yet impacted solar investments in Germany.
– Increasing RoI compensates for economic uncertainty
– Private investors can access loan programs

Dr. Wicht said: “The short-term picture is dominated by tight credits! A panel of bankers clearly indicated that they love solar, but don’t have the money right now. They have clear expectations on their solar RoI. Now, the portfolio for solar is already booked. So, there’s no need for bankers to invest much more than what we have seen.”

For instance, in Italy, conditions are very good, but lenders do not accept thin film. Thin film does not have long term experience like crystalline. With crystalline, they already meet their RoI expectations due to lower module prices.

Solar installations are still in good shape. The economic downturn has not yet impacted the solar investments in Germany. Rooftops — commercial and residential are in good shape. They are likely to achieve the same levels as last year.

Outlook — mid-term
In the mid term, there are exciting times ahead as the big wave of solar is rising.

* RoW is preparing large solar programs.
– Australia will invest in 1GW; China and India. India is also likely to concretize its plans.

* Every month, new several 100MW announcements are being made in US, especially, California, Nevada. The US is picking up in solar.

* In Europe, the Desertec Group — Euro 400bn to develop solar plants in North Africa
– Lead by Munchner Ruck (Munich Re), Siemens, Deutsche Bank and RWE
– Big credit to solar (all technologies)
– Equal to equal discussions with uranium, fossil energy providers

The priority will be on solar power plants, but we are certain there is space for solar, PV and PV concentrated installations.

* China will not leave REE business to US and Europeans

Desertec project update
On July 13, 15 industrial members joined the Desertec Interest Group. They made the statement that they want to make the solar power plant to supply 20 percent of the European electricity by 2020 from North Africa.

As for the next step, over the next two years, feasibility studies will be conducted on solar power plants as well as grid connection, and transporting of energy through the whole of Europe.

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