Graph of the Day: The solar boom-bust

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The boom-bust cycle for the solar value chain has been dramatic, and margins may never return to early highs because of the commoditisation of modules.

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Today’s Graph of the Day comes from a Citigroup analysis of the global solar sector in February, 2012, that marked the launch of its coverage of 17 listed companies in the solar manufacturing chain. The graph shows the dramatic gains made in solar stocks five years, and the equally dramatic and prolonged slump since that date.

solar boom

So how to pick a winning stock? Not easy. Citi analysts say that an explosion in early demand and a lack manufacturing capacity led to manufacturing returns close to 50 per cent in the early years, hence the solar boom. But this inevitably led to an enormous influx of capital, which then led to a situation of enormous oversupply. Hence the solar bust.

Citi suggests there has already been a shakeout in the poly sector, and there could be one in the module manufacturing sector. It predicts the sector will be dominated by 7 to 8 players with an average of 4-5GW of annual capacity each, whereas the bulk of players now have capacity of a just few hundred MW each. (That forecast is based on annual demand of 35GW).

Citi says this shakeout should see margins and returns recover, though not to the extreme levels seen in the previous boom phase of the solar cycle – much of this attributed to the structural shifts going on in the sector.

“Will we ever see the gross margin levels we saw prior to the downturn for the upstream panel manufacturers – we doubt it,” the Citi analysts write. “We attribute this to the structural shift occurring in the sector – mainly the commoditization of the panel manufacturing business.

“We surveyed over 20 electric utilities in the US, one key theme emerged: it has become very difficult to distinguish one panel manufacturer from the other – they all look the same . This commoditization in the panel business has led to a permanent structural shift in the sector, in our view.” To differentiate, the panel manufacturers will need to offer more services – including shifting resources further downstream into development, construction and operations and maintenance.




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