Graph of the Day: Is Japan’s solar bubble about to burst?

Today’s graph of the day comes from a newly released report from analysts at Morningstar, which raises questions about the dynamics of the global solar market – particularly the earnings of manufacturers – and about the solar boom in Japan.

According to analyst Stephen Simko, there is no question that a bubble has developed in the Japanese market, given the extraordinarily high subsidy levels and the fact the market is uncapped.

Most analysts expect Japan to be one of the two biggest markets for solar PV in the world this year, and say it could even pip China under some more optimistic scenarios – particularly given the generous nature of its feed-in tariffs.

“We are projecting Japanese solar installations will grow by 170 per cent this year after doubling in 2012,” Simko writes. “History would hint it’s only a matter of time before these are scaled back dramatically.

“Every solar bubble to date has been caused by poorly designed subsidies being set far too high, and each of these bubbles has eventually been pricked (notable examples include Spain, Italy, the Czech Republic and Germany). We’re certain Japan will be added to the list within the next 12-18 months.”

Simko presented two illustrations to make his point. The first is a pie chart showing the relative market share of various countries this year and last. Japan’s share has effectively more than doubled to around 9 per cent.

The second illustration is a table that shows the historical market growth (and decline) in the major markets. Simko’s overall projections are well short of other analysts such as Deutsche Bank (which predicts more than 40GW globally in 2013 and 45GW in 2014). But it illustrates the decline in the German and Italian markets.

Simko uses these graphs to express caution about the valuation of some companies, such as SunPower, which are relying on high-margin markets such as Japan. And he also questions whether many Chinese companies other than Jinko will be able to produce real profits this year as the market for solar PV is still precariously balanced.

While module prices have rebounded, Simko argues that further cost reductions are needed to ensure market growth, and long term profitability. “Margins (are) improving, but bottom-line profits for most (will) remain elusive,” he writes.

“With module pricing having stabilised in 2013 and production costs still falling, the top solar module companies are quickly approaching positive EBIT (earnings before interest and tax) territory. Unfortunately, these positive developments are well short of a full-blown cyclical upturn, and most companies are likely to continue reporting losses on the bottom line for some time to come.”