Dark Skies Ahead for Solar Sector


". . .the supply/demand outlook is deteriorating, rather than improving."

The troubles for the solar sector are far from over, Barclays Capital analyst Vishal Shah warned Thursday morning.

Formerly bullish on the group as a whole, Shah Thursday reduced his sector rating on solar to Neutral. Shah says the Q2 weakness in solar company results represents a "secular, not seasonal decline."

Pricing pressure, he contends, is intensifying. Shah says checks find Q4 module ASPs from Chinese companies could drop to $1.80/watt, worse than the $2/watt he had previously been expecting. "Given the overly optimistic demand outlook of most Chinese solar players and expectations of continued production ramps, we see additional downside risk to module pricing exiting 2009," he adds. "More importantly, we expect 2010 module ASPs to decline by 25%-30%."

At the same time, Shah warns that the supply/demand outlook is deteriorating, rather than improving. "We expect U.S. demand to pick-up at a slower pace relative to prior expectations and see potential downside risk to inflated demand expectations in China," he writes. "Moreover, our updated supply outlook suggests that industry over-supply could persist in [the 2010 second half] until production capacity reductions occur at a rapid pace across the industry."

For the Chinese solar stocks, he warns, earnings risk is to the downside. "Market share gains and not profitability is the motive for most Chinese solar companies—given the inflated opex/interest cost structures, operating break-even levels of companies continue to increase and as such we expect companies to continue to produce even as overall profitability levels deteriorate." As for the U.S. solar players, he says the outlook is "mixed at best," given a pick-up which he thinks will be slower than expected.

Finally, raising a potentially huge problem for the solar industry, he wonders whether the current German feed-in tariff level is sustainable, given significant volume growth in 2009 and the potential for further acceleration in 2010, and the impact of the trend on rate-payers in the difficult economic environment. He adds that significant module price declines and attractive project economics "may prompt policy makers to reconsider generous FIT levels."

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