Worst over for solar sector, but margins stay slim

Mainland solar panel makers are recovering but analysts say they need to soon make major strategic decisions to guarantee their survival

PUBLISHED : Thursday, 22 May, 2014, 3:48pm
UPDATED : Friday, 23 May, 2014, 6:54pm

The worst days for the overcapacity-troubled global solar panels and parts industry, dominated by mainland producers, may have passed, but profit margins remain slim, analysts say.

They say firms need to make strategic decisions this year to ensure their long-term survival.

"Now that the top-tier players have returned to profit on the operating level, the question they face is how they will differentiate themselves from the rest of the pack, which means they will need to decide what kind of technological pathway they want to pursue," Thomas Reindl, deputy chief executive of the Solar Energy Research Institute of Singapore, told a panel discussion at a solar energy conference in Shanghai on Wednesday.

Whatever equipment investment they make will be obsolete in a few years in an industry characterised by rapid technological innovation and cost reductions, Reindl said.

Jenny Chase, head of solar analysis at data provider and consultancy Bloomberg New Energy Finance, said the world has at least 70 gigawatts (GW) of annual solar panel manufacturing capacity.

But only 17 firms with a combined capacity of 26GW are financially strong enough to be considered "bankable" - defined as those that have supplied to at least five solar farm projects in the past two years with financing from five different commercial banks.

"Even if prices stabilise or pick up somewhat, it will continue to be difficult to make money in the solar manufacturing sector," Chase said. "Margins are by definition extremely tight in this commodity business."

She said many producers were still making losses in last year's fourth quarter, and the most competitive panel makers were making profit margins of 10 per cent or less before interest and taxes. Those that had diversified into downstream development of solar farms made as much as 15 per cent.

Of the 70GW of capacity, she said, only 40GW were actively utilised last year, matching demand, with the rest idled.

Chase expects 5GW of effective supply to be added this year, mainly through the purchase of previously mothballed production lines that are considered cost-competitive enough.

After bottoming out in late 2012 at just above US$15 a kilogram, the spot price of raw material polysilicon should rise further, she said, to between US$23 and US$25 in this year's second half from about US$22 in the first half.

This is driven by her projection of a 15 per cent rise in projected global demand to 46GW this year, much of which will depend on demand from the mainland - the world's largest market.

Ash Sharma, senior solar sector research director at consultancy IHS, is less optimistic, predicting polysilicon prices will rise just 1 per cent to 2 per cent in the second half and solar panel prices will remain flat.

Owing to industry overcapacity and shrinkage of the European market - previously the world's largest - Beijing launched nationwide subsidies for solar power generation last year to jump-start the domestic market.

Sun Guangbin, secretary general of the solar products branch of the China Chamber of Commerce for Import & Export of Machinery & Electronic Products, said Europe's share of Chinese solar exports fell to 19 per cent in this year's first quarter from 30 per cent in the whole of last year.

This was because the European Union imposed quotas on Chinese solar imports last year. Europe accounted for 70 per cent of China's solar exports a few years ago.

The United States' share was 18 per cent in this year's first quarter, up from 15 per cent last year.

The US imposed hefty duties on Chinese solar panels in 2012 and may close a loophole this year that allowed mainland products to be shipped to the US via Taiwan after being processed there.

Australia and India, which each took 4 per cent to 5 per cent of Chinese solar exports, have recently respectively alleged and found mainland producers to have "dumped" products in their market by selling them below cost.

Asia's share of Chinese solar exports jumped to 56 per cent in this year's first quarter from 45 per cent last year, thanks to surging shipments to Japan.

Beijing has set a 14GW target for installations of solar farms this year, but industry executives expect it could be missed by about 2GW, because of the reluctance of banks to lend to the nascent rooftop solar farms segment. Last year's installations totalled 12.9 GW.

Of the 14GW target, 8GW is for rooftop projects on factories and other buildings, and 6GW for ground-mounted projects, most of which rely on investment from professional power generators.

Remote ground-mounted projects previously dominated the domestic market, but owing to the limited ability of power grid operators to build new infrastructure to cope with their long-distance power distribution needs, rooftop solar projects at consumption centres in coastal provinces are being encouraged this year.

Wang Jin, director of the National Development and Reform Commission's Institute of International Energy, said insurers are expected to launch solar sector insurance products next month, which would bolster banks' confidence to lend to rooftop projects.

The products will cover the risk of a shortfall in solar farm output owing to weather conditions, panel quality problems or power buyers' failure to meet expected purchase volumes.