Light at the end of the tunnel: The beginning of PV industry recovery in Q2 2013

16,September,2013

The global solar photovoltaic (PV) industry has been struggling for almost two years. Massive over-capacity and slower-than-anticipated market growth caused by changes in European feed-in tariffs led to a collapse in prices and consistently negative margins across the value chain. This in turn led to a number of insolvencies, layoffs and acquisitions, particularly in Europe.
However, second quarter 2013 results are showing the first concrete signs of PV industry recovery. While many manufacturers are still not profitable, PV module prices and shipments are rising as demand booms in China, Japan and the United States.
This recovery has not yet extended to all parts of the value chain. Additionally, those manufacturers and developers which have not been able to adapt to new industry dynamics and a new geography remain in trouble.

Market shift
As predicted by Solar Server and market analysts, as feed-in tariffs in Spain, Italy and Germany have either been reduced or closed, the center of the global PV market has shifted to Asia. The first six months of 2013 have seen more PV shipments to Asia than Europe, as the sharpest geographical shift in the PV industry to date.
This massive increase in Asian market demand is the primary factor in PV industry recovery, as new demand from China, Japan and the United States has more than made up for the fall in European demand in raw terms. However, each of these markets is very different, and these differences determine the details of this recovery.

China
Inspired in part by pending trade action, China has massively boosted its domestic goals, setting a target in July 2013 to install 10 GW annually, to reach at least 35 GW by 2015.
While such ambitious goals might be met with skepticism following India's failure to meet deliverables under its National Solar Mission, China appears to be a very different case. Aided by a number of pre-existing policies including the Golden Sun Program and a feed-in tariff, the nation's PV industry has boomed overnight, with particularly dramatic growth in the utility-scale sector.
Accurate data is notoriously hard to come by in China, a detail which was explored in Solar Server's August 2013 report. However, many analysts predict that China will come close to reaching its 10 GW goal for 2013, with Mercom Capital forecasting 8.5 GW of installations.

Japan
The Japanese government has also been slow of late in releasing statistics, and thus it is difficult to quantify demand in the second quarter of 2013. However, Japanese PV demand reached 1.73 GW in the first quarter of 2013, and every indication from both quarterly results and limited statistics released by the nation's Ministry of Economy, Trade and Industry (METI) suggest that this has been matched in the following three months.

This growth has been driven by the nation's feed-in tariff, which is considered the most lucrative in the world for developers. This policy has particularly aided the utility-scale segment, which has gone from a very small fraction of projects to an increasing share of installed capacity and the overwhelming majority of feed-in tariff applications by capacity.
Another fundamental change in the market driven by this rapid growth is the shift from mostly domestic supply to a large amount of imports. Of the 1.73 GW of Japanese PV shipments in the first quarter, imports represented 800 MW.
Few large PV makers have not benefitted from this change. Canadian Solar, JA Solar and SunPower all reported strong sales into Japan in the second quarter of 2013, and Trina expects additional sales into Japan in the second half of 2013.
As Japanese PV module selling prices are higher than in the United States or China, this has translated into higher revenues and margins for companies able to take advantage of this significant opportunity.

The United States
While not as large as the Japanese or Chinese markets, the rapid growth of the U.S. PV market has also been important for the global PV industry. The nation installed an impressive 796 MW of PV in the second quarter of 2013, a 32% increase over the second quarter of 2012.
The U.S. market is still dominated by utility-scale PV. First Solar has been able to carve out a strong market position based on its business model whereby it develops and builds very large plants for which it supplies the PV modules, and similar downstream vertical integration has also served well other companies including Canadian Solar. However, Yingli, Trina and all other top-tier c-Si PV makers have benefitted from the increase in U.S. demand.
While much has been made of the impact of third-party solar on the U.S. residential market, both the residential and small commercial segments still represent a smaller share of the total market. As the United States has never had a national feed-in tariff or effective state feed-in tariffs, it has yet to see the kind of dramatic growth that Europe and Japan have seen in the residential sector.

PV industry recovery by segment: modules
Recovery in the PV industry has been uneven from segment to segment, and vertically integrated PV module makers have been the primary beneficiaries to date. The second quarter results of the top four PV module makers by volume (Yingli, Sharp, Trina, Canadian Solar) show consistent improvements, with margins rising year-over-year for every one. Margins additionally rose quarter-to-quarter for every PV maker except Sharp.
Readers will note that I have omitted First Solar from this analysis, due to the very large share of its project development business and the very different quarter-to-quarter shifts in revenue from that business model.
Yingli and Trina are still reporting negative operating margins, but these have been reduced to -3.8% and -5.4% respectively. Most importantly, c-Si PV prices are rising. Chinese-made c-Si modules PV hit a low of USD 0.53 per watt in January and February 2013, and rose to EUR 0.56 in June and July, according to PV Exchange.
Manufacturers' margins have also been supported by rising shipments, translating to higher capacity utilization rates, with shipments exceeding capacity ratings in some cases.

Cells and wafer makers struggle
With the shift to vertically integrated manufacturing, many of the largest PV makers produce wafers and cells for their own PV modules. As one of the last remaining large Chinese PV cell makers, JA Solar's results have improved in recent quarters, but this may be in part due to its shift to more PV module sales. Like Yingli and Trina, JA Solar is not yet reporting a profit, but reduced its operating margin to -2.1% in the second quarter of 2013.
Taiwanese PV cell makers appear to be doing much better, buoyed by Chinese demand for tariff-free PV cells for the U.S. market.
Big wafer makers continue to struggle with low prices. LDK Solar, one of the leaders by shipments, continues to report very heavy losses, and analysts have speculated that the only way that it has avoided bankruptcy is the support of Chinese banks.
Other large players got out of the wafer business in recent years, including REC ASA, which shed its wafer manufacturing at three sites in Norway in 2011 and 2012 in favor of vertically integrated manufacturing in Singapore.

Polysilicon prices remain low
Polysilicon makers also continue to struggle. While industry leaders Wacker Chemie, Hemlock and REC had traditionally maintained very high margins, these have fallen sharply over the last two years, following a collapse in polysilicon prices.
Polysilicon prices saw a modest recovery in the first six months of 2013. However, most of the market demand is in China, and high Chinese tariffs on U.S.-made polysilicon put Hemlock and REC in a poor position in that market. And given the large overcapacity in the market, it is unlikely that Chinese polysilicon prices will rise significantly in 2013.

It should be noted that China has struggled in the past to compete with the quality of polysilicon being produced in the West, however LDK, Daqo and ReneSola have all recently completed hydrochlorination upgrades.
As OCI Chemical was given a much lower tariff rate, it is in a very good position to benefit from these changes, and the company's overall margins improved in the second quarter after falling for two years.

Manufacturing equipment
The manufacturing equipment sector is still suffering. Second quarter industry data has not yet been published, and first quarter data showed the eighth consecutive quarter of book-to-bill ratios below parity as orders fell to USD 174 million, typically representing orders for equipment upgrades instead of capacity expansions.
Meyer Burger has seen a number of new orders. Applied Materials' PV equipment revenues remain at a very low level, and the company's book-to-bill remains well below parity. Centrotherm has not yet released second quarter results, but reports the cancellation of a USD 380 million contract to supply a PV factory in Algeria.
Polysilicon equipment makers are doing better, particularly those selling into the Asian markets, where there is a need for technical improvements. The hydrochlorination upgrades for major Chinese polysilicon translated into sales recovery for GT Advanced Technologies, which has suffered from a lack fo PV equipment orders.
IHS has predicted that capital investments in PV manufacturing will increase 30% in 2014, a view which analysts quoted by Bloomberg have shared. However, NPD Solarbuzz argues that instead of adding capacity, many Tier 1 PV manufacturers will instead take advantage of the underutilized capacities of smaller competitors, in a “fabless” strategy borrowed from the semiconductor industry.

Prices, shipments to continue to improve in H2 2013
Based upon the shipment, revenue and margin estimates of major PV module makers, the third quarter of 2013 is expected to show continued improvement in selling prices. This is in part due to the price undertaking deal reached between the EU and China, which has brought Chinese crystalline silicon PV prices up to EUR 0.56 (USD 0.74) per watt.
There is an irony that initially trade action against China was described as punitive, given that the price undertaking has raised selling prices for top-tier Chinese PV makers which are struggling to regain profitability.
Furthermore, IHS predicts that shipments will continue to grow in the second half of 2013 for Yingli, Trina and Canadian Solar. The larger industry picture is of course dependent upon market conditions, which so far look positive at least for the remainder of 2013.
Warnings of grid overcapacity and transmission constraints have not yet translated into a slowdown in shipments into the Japanese market, and the Chinese market continues to boom, with some very large projects announced, particularly in the West of the nation.

2014 and beyond
Looking beyond 2014, it remains to be seen how long the Japanese market can sustain its current levels of dramatic growth, and how much of the 17.5 GW or more of utility-scale PV projects that have been approved under the feed-in tariff will actually be built.
The ongoing disaster at the Fukushima Nuclear Power Plant has cemented public support for renewable energy, despite the rule of the Shinzō Abe's pro-nuclear Liberal Democratic Party. The nation has contracted several very large energy storage projects, which show a will to push technical boundaries in integrating renewable energy.
Despite these positive signs, it should be remembered that the PV industry has suffered in the past from overdependence upon large markets driven by feed-in tariffs.

China and the United States both look set for medium-term growth, in the case of China backed by enormous project pipelines. China needs to significantly invest in new transmission to integrate even its existing renewable energy capacity, but has shown that it will continue to build new, large projects regardless of whether adequate transmission or other technical needs are yet satisfied. Here, the role of Chinese PV projects as a way to absorb demand from its PV manufacturing and keep Chinese citizens employed cannot be underestimated.
Another change is that following its retaliatory trade action against U.S. polysilicon makers, China is in a better position to dominate another part of the PV value chain. If anything, this shows both that China remains firmly invested in PV, and that Chinese government warnings that a solar trade war would damage the West appear to be accurate predictions.
It the third quarter of 2013, the global PV industry has become a new industry, based on new markets. We will see what tomorrow brings.