Manufacturing eclipse in 2012
March, 2012: Bargain-basement PV prices are here to stay. That’s good news for project investors and emerging PV markets. But manufacturing companies will have to endure steep operating losses for at least another year as oversupply persists into 2013, said participants in PHOTON’s 7th Solar Investors Conference, which took place March 27 in Berlin.
Industry participants described a sector poised for a long slog through 2012 thanks to waning political support in key established markets, but they said policy catalysts in Asia and the US should set up PV for long years of solid gains.
That won’t do much for the silicon-to-module supply chain in the short term. “Manufacturers will struggle to make money in 2012,” said Martin Meyers of PHOTON Consulting. He predicts operating losses will equal 40 percent of revenues in the first quarter before starting to rise slowly toward losses of 30 percent later in the year. “It is going to be a very challenging and painful (year),” he says. Roughly half of the 120 or so module makers doing business at the start of the year will not operate in 2013, the firm predicts. The number will halve again in 2014, and it won’t necessarily be the current leaders who survive. “At least four of the biggest 10 are not providing the quality that will be needed for the future,” says Peter Fath, CTO of centrotherm photovoltaics. Part of the reason is that their facilities were built during the boom when site selection, access to cheap power and other cost factors did not matter as much.
That’s not to say PV manufacturing cannot be profitable, but the earnings lie farther than ever down the PV supply chain. “Companies that have diversified out of pure manufacturing are in much better position to ride out this difficult time,” Meyers says. Profits in the silicon-to-module chain necessarily will remain low because of the supply overhang that lets customers force prices down toward producers’ cash costs. System prices, meanwhile, will be set by the value of the electricity they generate, Meyers says. He thinks 70 percent of the operating profit generated by the sale of a PV system will come from balance of systems and projects in 2015, leaving a paltry 30 percent for the upstream companies.
All day, panelists kept coming back to the growing importance of markets outside of Europe. Meyers says the continent has peaked and its relative share of the global market will continue to shrink. He advises companies to diversify their sales to a series of markets. “Develop products suited specifically for these markets,” he says. Presentations by representatives from the US, Italian and German solar industry associations, as well as by a Japanese research firm, showed how varied the political incentives can be in different markets. In different ways, each speaker underscored how much PV demand remains subject to political will. Prospects for growth look good in the US and Japan, and Suntech, the leading module producer, says Asia and the Americas will drive installation gains in the coming years. Other emerging markets also received some attention when the discussion turned to 2013 and beyond. “The Middle East and Africa are knocking at the door” as markets for production equipment, says Fath. That will likely mean installations there, as well. China remains the great hope for PV demand, and Ji Cai, of industry association CREIA, described how the country has conservatively approached defining the support parameters for its domestic market.
Gaetan Masson, of the European Photovoltaic Industry Association (EPIA), says it is too soon to write the epitaph for Europe, noting that other markets such as Belgium or the UK could absorb any demand forced out of Germany and Italy. “There are no market constraints in Europe, no caps,” he said. “With prices so low, there is a chance to see huge demand. It depends on the political decisions.” And those have not necessarily been PV-friendly in recent months, which is why Masson and EPIA predict contraction in 2012. “We need political acceptance if we want big markets in Europe.” Representatives from the German and Italian solar industry associations likewise lamented political decisions that have caused market distortions. “Expenses are out of control” in Italy, says Averaldo Farri, vice president of sales for inverter maker Power-One but speaking as a representative of industry association GIFI. “This is not our fault.” Regardless, the ramifications will be lower installations in Germany and Italy, if not in 2012, then certainly in subsequent years.
With Europe looking less robust, the panelists agreed that 2012 would mark the nadir in terms of global PV demand, at around 27 GW. But growth rates should average around 25 percent in each of the subsequent five years, with markets like China, the USA and India adding multiple GWs. The problem for manufacturers, though, is the manufacturing oversupply likely won’t get resolved in just one year. “The banks haven’t pulled the plugs yet” on unprofitable producers, said analyst Goetz Fischbeck. “Most manufacturers still have access to capital.” JA’s Lee contested that notion, saying about 70 percent of his company’s customers stopped ordering last year after banks stopped financing them. But several panelists said cut-rate producers, particularly module makers, could fire up their lines again rather quickly if demand rebounds. “The price segment, those that compete on price alone, will always exist,” Lee admitted.
That’s a scary notion for companies bleeding money already, and it has them trying to shift competition away from just price to brand and technology. In the meantime, they are hunkering down for quarters, if not years, of losses. It naturally helps to have deep-pocketed backers, like SunPower has with Total. But Suntech’s head of investor relations, Rory Macpherson, said multinational conglomerates are not nimble enough to react in time to shifting markets and new technologies. JA’s Lee says companies like Siemens won’t chase gross margins lower than 8 percent, making solar unattractive to them. That was a tacit admission that gross margins likely won’t return to double digits any time soon, if ever.
In fact, there was surprisingly little talk on costs and prices. Suntech says the rate of decline in ASPs will slow if not stop. “A race to the bottom is in nobody’s interests, and it is unsustainable,” Macpherson said. He thinks cost reductions will slow as the easiest hurdles have already been taken, allowing the cash cost to produce to serve as a floor for prices. But forecasts for excess supply make stable prices rather unlikely, other panelists said. And companies like JA, formerly a cell specialist, are expanding module capacity. “Our cell customers are dying,” he said. “We need to provide modules on our own to get our cells to market and we also see higher profitability with modules.”
Fath says production capacities are not as big as consulting firms report because large amounts of installed lines are no longer economical. Still, in 2011, PHOTON found that cell production exceeded installations by around 10 GW, so there remains a considerable amount of excess. Dieter Manz says there will be a downturn in spending on equipment, but that this business is cyclical and will rebound soon. “Companies have two choices: either they exit the business or they invest in advanced technology,” he said. JYT called the market challenging, but says it will continue expanding because new markets, like the Middle East and Africa, will want to establish their own domestic PV manufacturing industries. “We see a strong future for solar demand,” says Zhixin Li, president of JYT, a China-based equipment maker. The men discounted the threat of a growing secondary market for PV production equipment. “It’s nothing we should be too worried about this year and next year,” Manz said.
There are enough other things to worry about, anyway, most agreed. “There have been so many changes all in one shot, the industry is not ready to face them all at once,” said Farri. “It will take time for these different aspects to get clarified.” Lee says the consolidation should be over by the middle of next year, as more manufacturers run out of cash. Then…well, that remains very much in debate. But in summing up his presentation, Meyers also summed up the overall mood at the conference: “There is still tremendous opportunity in solar.”
Source: PHOTON |
