Solar market suffers inventory glut

EL SEGUNDO, USA: A massive oversupply of solar modules combined with disappointing demand caused average inventories throughout the solar supply chain to soar by 64.3 percent, spurring major oversupply and price erosion, according to iSuppli Corp.

Average days of inventory among solar module and cell makers, polysilicon and wafer suppliers and vertically integrated companies that provide all these items surged to more than 121 in the first quarter of 2009, up from 74.2 during the same period in 2008.

“The worldwide solar industry for the first quarter added the equivalent of one-and-a-half months of excess inventory in just one year,” said Dr. Henning Wicht, principal analyst, Photovoltaics (PV) research, for iSuppli. “With new polysilicon capacity coming online this year, the PV industry will suffer further price erosion, at all nodes of the value chain.”

iSuppli estimates the spot price per kilogram for polysilicon, the key raw material for making solar cells, will drop to $50 by the end of the year, down by 72 percent from $180 per kilogram at the beginning of 2009.

The figure presents average days of inventory for the major segments of the solar supply chain.Source: iSuppli, July 2009

The perils of poly
On the demand side, the solar market is coping with a demand sinkhole that was left after Spain’s PV demand collapsed. Despite this, solar-cell makers are still compelled to take deliveries from their polysilicon suppliers due to their long-term contractual obligations.

On the supply side, polysilicon providers recently invested billions in new facilities, forcing them to produce in order to cover these new fixed costs.

Integrated firms holding the bag
Some of the hardest-hit entities in the PV industry have been the fully integrated players. These companies, including REC, Yingli, and SolarWorld, have operations in all three nodes of the value chain: polysilicon, wafer and cells.

Inventory levels for this segment jumped to more than 161 days in the first quarter, up from 86 days during the first three months of 2008.

One major reason these companies have borne the brunt of the inventory surge is their integrated structure. These firms possess integrated wafer and polysilicon production that help secure raw materials during periods of a supply bottleneck in the industry.

However, the integrated firms found their hands tied to their own capacity at various nodes when demand dropped off a cliff at the end of 2008.

This, in turn, created a lag time relative to other sectors in the industry that is now just reacting to the business environment, causing the severe inventory build-ups that led to margin compression.

Cell and module manufacturers
Cell and module manufacturers are currently experiencing significant increases in inventory, with levels rising to 105 days from the third-quarter level in 2008 of 47 days. This is due, in part, to pressure from wafer and polysilicon suppliers desiring that their customers adhere to shipment schedules negotiated in 2007 and 2008.

Polysilicon and wafer manufacturing have done the best job of maintaining inventories in this dynamic environment. With only a modest increase to 98 days from 74 days a year ago, it would seem that things are not looking so bad at this node compared to that of cell and module manufacturers.

However, as the year rolls on, this node in the chain will be hit with additional capacity coming online from major existing and relatively new polysilicon players. Such a development will lead to severe turmoil at this section of the value chain as the spot market will be flooded with excess capacity, with many looking to only cover variable costs.

iSuppli expects to see inventories at this node in the value chain to rise throughout this year and persist into 2010.

Hoku, Tianwei amend polysilicon supply agreements

POCATELLO, USA & CHENGDU, CHINA: Hoku Materials Inc., a wholly owned subsidiary of Hoku Scientific Inc., established to manufacture and sell polysilicon for the solar market, and Tianwei New Energy (Chengdu) Wafer Co. Ltd., a subsidiary of Tianwei New Energy Holdings Co. Ltd. that manufactures silicon wafers, photovoltaic cells, and modules in China, have amended their two polysilicon supply contracts.

This amendment is meant to accelerate $5 million of the remaining $7 million in prepayments that Tianwei was obligated to pay to Hoku, eliminate Hoku's near-term shipping obligation to Tianwei, and adjust the long-term contract price.

Tianwei had already paid Hoku a combined $74 million in prepayments through April 30, 2009. Before the amendments, Tianwei was obligated to pay Hoku an additional $7 million upon Hoku's first shipment of products in 2010.

In exchange for a long-term contract price adjustment, Tianwei agreed to pay $5 million of this remaining $7 million up front, and eliminated the requirement that Hoku ship polysilicon to Tianwei before March 2010. These early shipments would have been additive to the long-term contract amounts, and Hoku's failure to make these shipments would have resulted in a price penalty.

The remaining $2 million is to be paid when Hoku commences polysilicon shipments to Tianwei in 2010. As of June 30, 2009, Tianwei has paid to Hoku a combined aggregate of $79 million in prepayments for future product deliveries.

Hoku reported that the average prices over the ten-year term of each contract were adjusted downward by eight percent, such that the total amounts payable over the ten-year term of both agreements was reduced from approximately $511 million to approximately $468 million.

"The early payment of $5 million has helped us manage cash flow for our Hoku Materials subsidiary, especially as some of our other customers were requesting extensions of time make their prepayments to us," said Dustin Shindo, chairman and CEO of Hoku Scientific.

"Eliminating the early shipment requirement reduces near-term pressure for us to commence shipments, and allows us to more effectively manage the timing of our capital expenditures as we seek to raise additional financing for continuing construction costs."

"Tianwei has contributed $79 million out of a combined total of $158 million in prepayments from our polysilicon customers," said Shindo. "Their strong commitment to our project is reflected not just in the amount of capital committed, but in our mutual willingness to adjust our contractual commitments based on recent market conditions.

"The agreed upon unit prices remain attractive for Hoku over the ten-year period, while also offering Tianwei the ability to more effectively control its production costs and be competitive. The accelerated payment of $5 million helps us manage our near-term capital requirements."

"Tianwei views Hoku as one of our key strategic partners," said Aihua Guo, Tianwei's general manager. "These amendments strengthen our long-term commitment to Hoku, and we remain confident in their ability to begin shipping high quality polysilicon to us in the months ahead."

LDK Solar provides business update

XINYU CITY, CHINA & SUNNYVALE, USA: LDK Solar Co. Ltd, a leading manufacturer of multicrystalline solar wafers, provided an updated outlook for the second quarter ended June 30, 2009.

For the second quarter of 2009, LDK Solar estimates shipments between 220 and 230 megawatts ("MW"). This compares to its previously issued guidance for the second quarter of 2009 of wafer shipments in the range of 200 to 220 MW. The company expects to record between $215 and $225 million in revenues.

LDK Solar additionally provided an update on its financing activities. The company secured a loan in the aggregate principal amount of RMB 500 million (equivalent to approximately $73 million), with a term of one year, from The Export-Import Bank of China.

The company also secured a loan in the aggregate principal amount of RMB 500 million (equivalent to approximately $73 million), with a term of three years, from Huarong International Trust Co. Ltd to support LDK Solar's polysilicon plant construction.

Huarong International Trust is a state-controlled company permitted under the relevant PRC laws and regulations to provide enterprises with financing facilities.

LDK Solar had a healthy cash position of more than $250 million and pledged bank deposits and time deposits of more than $170 million as of June 30, 2009.

"During the second half of the second quarter, our wafer shipments were driven by stronger than expected demand," stated Xiaofeng Peng, Chairman and CEO of LDK Solar. "Our annualized wafer capacity at June 30, 2009 reached 1.5 gigawatts ("GW"). We are encouraged by the recent improvement in market demand and expect to resume the expansion of our wafer plant with the goal of reaching 2 GW annualized wafer capacity by the end of 2009."

"The construction of our polysilicon plant continues to remain on schedule. The second train is targeted to reach mechanical completion in the third quarter of this year and the third train is expected to reach mechanical completion in the first quarter of 2010. We are very pleased to receive continued financial support for our growth plans from our local banks and view this as a testament to the promising future of the solar industry in China," concluded Peng.

This outlook for the three months ended June 30, 2009 is an estimate. Results are subject to change based on further review by the management. LDK Solar plans to report its full second quarter 2009 results in mid-August 2009. Once the reporting date is finalized, LDK Solar will issue a press release announcing the date and details of its second quarter conference call.

Are clouds dissipating on solar energy industry?

NEW TRIPOLI, USA: Have economic conditions improved for solar cell manufacturers or just changed in the past six months are questions detailed a the report: Opportunities in The Solar Market For Crystalline and Thin Film Solar Cells, published by The Information Network.

On November 18, 2008, we issued a press release entitled “Six Reasons for Cloudy Skies on the Solar Energy Industry”. All six issues presented cast a partial eclipse of the solar market.

Subsequently, a week later we forecast that the solar market would drop from 40 percent growth to 25 percent growth in 2009. At that time, thoughts of a downturn in the luminous market were considered a heresy and comments to the article reflected the attitude of the time -– up, up, up!

Six months have gone by and its time to revisit these issues to see if anything has changed from a fundamental standpoint. The original issues presented are repeated, along with an update on the current environment:

1. With oil at $60 a barrel, who cares about alternative energy? It's a short sighted view, but with the credit market crunch, who can get a loan to build solar plants anyway?

Oil is now $70 a barrel and rising, which to us suggests that people will start rethinking alternative energy. But the second point about the credit market crunch remains. Who can get a loan to build a solar plant anyway?

2. The high price of oil in the past year was a catalyst for development in other alternative energy sources, not just solar. Advances in wind, geothermal, and hydropower energy are reducing the cost of wind power to a point at which it is becoming competitive with traditional energy sources.

Nuclear power plants smaller than a garden shed and able to power 20,000 homes will be on sale within five years, say scientists at Los Alamos, the US government laboratory which developed the first atomic bomb. Among these alternative energy sources, hydropower and nuclear have the lowest carbon footprints (carbon dioxide produced during operation).

Other alternative energy programs have been affected by the downturn. Most serious was the recent announcement by President Obama that he was terminating the Yucca Mountain nuclear waste depository. This decision gives nuclear power an uncertain future, which may be a benefit to the solar energy.

3. Spain, a huge buyer of solar, reduced its incentive program to aid buyers in 2009. In California, a seemingly green state, Prop. 7 was defeated in the November election with a whopping 65 percent of the voters saying NO. One reason: electricity consumers would pay 10 percent above market rates for renewable power forever.

Spain has not resumed its incentive program and will subsidize just 500 megawatts of solar projects this year, down sharply from 2,400 megawatts in 2008. Mainland China’s stimulus and now Taiwan’s incentives (we suspect money coming in from Mainland China) will counter the downturn in Spain and Germany.

4. The spot market price of 6-inch solar-grade wafers have fallen to $9 from a high of $12.50 in September. This bodes poorly for thin film makers and equipment suppliers.

The thin film solar panel market and hence the equipment market grew strongly because of the shortage of polysilicon. Now that polysilicon is abundant and lower priced, why make thin film panels with 8% efficiency when you get 16+ percent efficiency with silicon wafers?

The spot market price of 6-inch solar-grade wafers has now dropped to below US$3.50 per unit. Winners are the environment and polysilicon solar manufacturers. Losers are the thin film solar manufacturers unless they can achieve a way of increasing efficiency, such as a thin film nano coating being developed by SolarPA in Pennsylvania.

5. Utilization is at only 56 percent. Our analysis of 103 solar manufacturers shows that panel production capacity in 2009 will be 15 GW whereas only 8.3 GW will be sold.

Utilization has not worsened as solar companies are struggling to sell products and new capacity has been put on hold, particularly in Asia.

While polysilicon prices have dropped, solar cell manufacturers are also experiencing a 25 percent drop in revenues in 2009 from last year. The drop in solar cell prices to below $1.50 per watt is not increasing demand, which we forecast last year.

6. The dollar has appreciated strongly against the euro by nearly 25 percent. Germany is the world's largest PV market. US solar companies have had to adjust selling prices to generate sales, reducing profit margins.

On November 18, 2008, 1 Euro was equal to US$1.269. On June 15, 2009, 1 Euro was equal to US$1.385, an appreciation in the Euro of 9 percent. Large, but insignificant in light of the overall economic issues currently facing Europe.

In the past six months we have seen somewhat of a stabilization in the worldwide economies and the share prices of solar companies ramp in recent weeks.

In fundamental terms, while there have been changes in these 6 issues, there are no overriding factors to change our forecast of a downturn in the solar industry through 2009 with demand resuming in 2010 back to a 40 percent growth we projected last year.

Solar PV forecast -- industry will bounce back with adjusted priorities

SCOTTSDALE, USA: IC Insights recently released a new report, its first to examine and analyze the solar photovoltaic industry from the perspective of semiconductor industry participants.

Solar Energy: Growth Opportunities for the Semiconductor Industry starts with the market for high-purity silicon shared with the chip industry, a market where the rapidly changing balance between supply and demand is contributing to a rethinking of priorities in the solar PV sector.

For some time, PV device makers have concentrated on reducing the amount of silicon required per watt of energy output, in part because silicon represented a large portion of the cost of a solar cell, but also because the supply of solar-grade silicon was limited. With new polysilicon plants coming on line, the supply constraint has evaporated and the cost of silicon is coming down significantly.

At the same time, demand for solar installations has plummeted due to the recession and credit crunch, as well as government incentive cutbacks in Europe. Solar panel inventories have built up, and competition has intensified for the reduced available business, driving prices down across the solar PV supply chain.

IC Insights forecasts that on a megawatt basis, global installations will drop 22 percent this year. Average selling prices for solar panels is expected to drop 28 percent.

IC Insights expects demand for solar installations to come charging back in 2010 as new government incentives in the US, Europe, and China gain traction. Installations are forecast to rise 37 percent to 6.7 gigawatts, with continued growth achieving a CAGR of 25 percent over the 2008-2013 forecast period.

The price drop of 2009, while not forecast to repeat in 2010-2013, will make solar systems more attractive in more markets even as government incentives supporting installations start to taper off starting four or five years down the road, IC Insights believes.

With the cost of silicon dropping, R&D investments in solar device design and manufacturing technology will back off the years-long push to minimize silicon consumption and center on new ways to reduce costs and boost device efficiency. For example, several solar cell makers are coming out with new back-contact cell designs, as described in the report.

Solar Energy: Growth Opportunities for the Semiconductor Industry provides a detailed forecast of the solar cell and panel market, including thin-film panels, as well as a system-level forecast and a country-by-country demand forecast.

The forecast includes a unique look at the semiconductor content of solar systems, a small but very fast-growing segment, and predicts global capital spending for solar cell manufacturers over five years. The report also reviews the numerous technology approaches challenging mainstream silicon wafer PV cells.

Solar Energy: Growth Opportunities for the Semiconductor Industry comes with a full-color three-ring binder for easy off-the shelf reference and an electronic copy on CD-ROM that includes image files of the charts and tables. The report is available for purchase at $2,975 for individual users and $5,880 for multi-user corporate situations.

Solar EnerTech, Jiangsu Shunda in solar JV

MENLO PARK, USA: Solar EnerTech Corp. announced the establishment of a joint venture with Jiangsu Shunda Semiconductor Development Co. Ltd, a leading PV raw material manufacturer, to pursue solar expansion opportunities in the US region.

Jiangsu Shunda is one of the largest polysilicon and wafer manufacturers in China, with an annual production output of approximately 1,500 metric tons of polysilicon.

The US JV company, which will be called Shunda-SolarE Technologies, Inc., is expected to begin operating in early May of 2009. The joint venture is expected to utilize Jiangsu Shunda's strength in polysilicon and wafer supply and Solar EnerTech's advanced solar cell technologies as well as its resources in the US market. Overall, both parties believe the joint venture establishes a vertically integrated operation in the US market with services ranging from the production of polysilicon to ingots and wafers, to solar cells, panels and solar system installation.

Jiangsu Shunda and Solar EnerTech contributed $1.0 million and $0.7 million in cash respectively to the initial setup cost of the JV. Jiangsu Shunda will own 55 percent of the JV company, Solar EnerTech will own 35 percent and the management of the JV will own the remaining 10 percent. Yunda Ni, President of Jiangsu Shunda will serve as the JV Chairman of the Board, Leo Young, CEO of Solar EnerTech will serve as the Board's Vice Chairman. The Board of Directors will be comprised of five seats, three of which will be reserved for Jiangsu Shunda and two for Solar EnerTech. A Chief Executive Officer of Shunda-SolarE Technologies is expected to be identified in the near future.

Leo Young, CEO of Solar EnerTech, commented: "We are extremely pleased to establish this joint venture with Jiangsu Shunda, a highly successful polysilicon manufacturer in China. We have a compelling opportunity to penetrate the US market with the establishment of this JV. Solar EnerTech has strong R&D capabilities supported by an outstanding technical team, and a fully operational US office governed by experienced management whereas Jiangsu Shunda maintains a UL listing, which is instrumental in conducting large scale operations in the US market, and controls the upstream supply which can provide large volumes of silicon feedstock to the JV in order to secure sizeable contract orders in the growing US market. Together, we can more easily penetrate US solar opportunities and establish Shunda-SolarE as a leading brand recognized for high quality solar products and service. We plan on providing investors with additional information on this JV in the coming weeks and months ahead."

Ni, President of Jiangsu Shunda added: "The goal of this joint venture is to build market share in the U.S. and maximize profitability. There is great synergy between both companies as well as with myself and Leo. Together, we believe we have an excellent opportunity to expand our market presence in the U.S. We look forward to a successful venture together."

Dramatic price forecast to reshape PV industry: iSuppli

I was very fortunate to attend a webinar on solar PV a couple of days back, thanks to iSuppli, USA. The webinar looked at:

* Polysilicon -- what is going on in the market?
* Cells and modules -- where will the prices go?

Dr. Henning Wicht, senior director and principal analyst, iSuppli, made it clear that the intention was to show what's coming out of primary industry research.

He said: "We believe that solar is a fantastic market. It has been growing over the last four years by revenue. It will continue to grow! There are not many industries with a growth path like that! However, in last the 18 months, the supply has been disconnected from demand."

This is exactly the point iSuppli addressed in its webinar. Dr. Wicht was accompanied by Stefan de Haan, senior analyst, photovoltaics, iSuppli.

iSuppli's recent findings are:
* Severe supply chain imbalances exist at polysilicon/wafer and cell/module levels.
* Short term polysilicon and module prices will decrease significantly.

Polysilicon: What's going on with supply and pricing?
If you looked at the global solar PV industry, many plants are under construction, and there are huge capacity expansion plans. There has been a dramatic decrease in production. In 2008, iSuppli estimated total production of solar PV at 60,000 metric tons. In 2009, about 100,000 metric tons will be produced!

What are the reasons for this supply situation? In 2005-06, the high margins of this industry attracted several newcomers. The cycle time to ramp up a polysilicon plant is 24-36 months, and including another 12 months to get finance, it takes about four years.

He said: "The decisions taken in year 2005-06 are coming to the market now. This is also why we see the big ramp in 2009-10. This is also the reason why the industry will have big difficulties to react on a short term notice. The polysilicon industry is a big super tanker, which has difficulties to maneuver on short term."

Looking at the demand side of things, iSuppli showed a graph where the two curves -- polysilicon supply and polysilicon demand meet, or rather cross, in early 2010. From that point on, the supply line passes the demand line. "That means, from that time onward, we definitely see prices for polysilicon decreasing," he said.

What will happen in 2009?
The key point to note is that the ramping rates of polysilicon and solar cells are completely different! The ramping rate of polysilicon is much steeper, than on the cell side. Polysilicon is more than doubling, while the cell industry is growing at 34 percent.

According to Dr. Wicht, the gap between demand and supply is already shrinking fast in 2009, which will lead to a price decrease in 2009.

Coming to prices, the polysilicon market boasts two kinds of prices -- long term and spot market. According to Dr. Wicht, the long term prices are already decreasing from around $100/kg in 2008, and it is expected to be around $80/kg in 2009.

On the other hand, the spot market price peaked in 2008 at around $400/kg. Now, it has already dropped. It will continue to drop, far beyond today's long term contract price, which will then, from 2010 onward, make up another round of discussion. This is because companies might tend to get out of their long term contracts to secure their silicon on the spot!

Summarizing, he said that polysilicon production will increase heavily. Next, supply will pass demand from 2010 onward, and then the industry will enter the oversupply situation for the next three to four years. The polysilicon industry will also react. In fact, iSuppli anticipates a recent announcement from a solar PV company to expand production capacity would be the last for quite a while!

What about projects on the way? These projects have to come on to the market and many of those will! This is precisely the reason why the industry will see silicon passing solar cells in capacity over the next few years.

Stefan de Haan added that the output of the PV modules industry will grow. The total module prod will likely grow to 11GW this year and to 20GW in 2012. Thin film modules will continuously gain market share and it probably account for 1/3rd of the total market by 2012. Production of crystalline cells will run in parallel. It is likely to reach 9GW for 2009 and 18GW for 2012.

Commenting on the competitive landscape, he added that many new players would be entering production in 2009, especially in the thin film business. "However, the current leaders -- QCells, Suntech and First Solar -- will increase their edge over the competition in terms of absolute production volumes," he said.

In general, it is a good thing that the industry is growing and that all of this capacity is coming online. However, this raises the question: can demand can keep up with the supply?

According to iSuppli, in 2009, the installation market will be flattening. In the sense, iSuppli projects that 4.2GW will be installed this year, or about 10 percent growth. However, this growth is much smaller in comparison to the previous years. Some of the reasons for slower growth in 2009 include changes in sustained feed-in tariffs and the global economic slowdown.

Hann added, "In H2-2010, module demand will probably return to the previous growth rates, of more than 20 percent per year."

Combining demand and supply, there is a massive oversupply of modules that has already been building up since early 2008. Back in 2008, this did not impact on the module prices as there was short term heavy demand from countries like Germany and Spain, from project developers and installation companies, etc. So, this was not noticeable earlier. However, in 2009, the oversupply situation is quite serious!

As a consequence, many suppliers will not be able to react to this situation in the short term. They will still need to run their factories to try and generate some revenue and satisfy the industry. Many had bet on some strong demand coming from USA and also China.

This year, the module prices will decline. Consequently, the declining prices will also create some additional demand. However, for the next two years, this fundamental oversupply situation will not change.

How far will prices drop?
So, what are the message for 2009? First, crystalline module prices will drop to about $2.50 per watt, and second, cost is going to be the differentiating factor! This was a point emphasized strongly by the iSuppli analysts.

Further, how should companies manage this situation, where supply is disconnected by demand? According to Dr. Wicht, there is 11.1GW of module supply vs. 4.2GW of installations. "We do not see that the demand is elastic and that everything will be good after the end of 2009. The gap is too large between demand and supply, and will last till end of 2010."

Installation capacity will surely become a bottleneck. There will be falling prices for silicon, as well as solar cells and modules. Also, the demand is not that elastic enough to absorb all modules produced.

Therefore, given this situation, what are the options for success, rather, what are the ideas to re-orient the solar PV business?

The first option could be to shut down 50 percent of production till price recovers. However, this is not a realistic option. Another could be to put expansion plans on hold. Yet another option for producers would be to become the best in class in production cost, an option, which is excellent, but difficult!

Probably, the best option would be for makers to integrate downstream. This includes new demand simulation in established markets as well as developing new markets.

Dr. Wicht said: "Anticipating bottlenecks are key for solar. The next bottlenecks are the bureaucracy and installation capacity. The production capacity would not be influential. Production cost and downstream integration are key." He advised solar PV producers to monitor their PV market demand and supply situation regularly.