Source: NPD SolarBuzz, SolarBuzz Quarterly.
New survey-based data from SolarBuzz points very clearly to a very much needed ongoing adjustment to manufacturers planned module shipments. The chart above illustrates the issue very succinctly. In SolarBuzz's survey conducted in Q2 of the current year, manufacturers were still planning on shipping just over 8 GW of modules in Q3 of this year and almost 9 GW in Q4. The somewhat obvious result was oversupply, a continued inventory build and falling module prices.
However, in the latest SolarBuzz survey, conducted at the end of Q3, those numbers have fallen to just over 6GW for Q3 and a tad over 5 GW for the final quarter of the year. This level of adjustment is precisely what is required to finally bring the industry back towards balance during the course of 2012.
Recently, we have pointed to growing evidence that such a process is clearly at work:
- On the demand side, the rest of the world has been making up for slack demand out of Europe. In particular, the latest data points to blistering demand in the U.S. - more detail here
- Likewise, China and Asia are showing extremely strong demand growth - see our article on the issue here
- And most importantly, on the supply side, the major Chinese players have drawn a halt to their excessively aggressive capacity expansion plans - more detail here. The data above of course simply highlights this new realism on the production and capacity side of the equation.
Taken together, these factors should allow the supply-demand imbalance currently facing the industry to be eroded as 2012 progresses. And of course, this new realism should eventually bring a better business environment. As Craig Stevens, President of NPD SolarBuzz states:
"While market share growth was the predominant corporate strategy at the beginning of the year, companies must now improve their financial viability, or they risk not being able to participate in the strong growth expected by grid parity now being established in key markets."
Indeed, on the basis of the manufacturers survey from SolarBuzz, global module inventories are now expected to stand at 7.3 GW at the end of this year, not insignificant but certainly less than the survey's previous indication of 8.6 GW.
For 2012, global demand is expected to grow by some 6% - with 43% growth in the rest of the world making up for a continued contraction out of Europe. That moderate growth should allow manufacturers to further reduce inventory levels as they tightly control capacity and production levels.
Calling a bottom in a distressed market is never easy. Moreover, pressures on inventories, prices and margins are likely to continue into Q1 of next year. However, at current valuations this has to be largely priced in. The question is one of how forward-looking the market is prepared to be. Much of that may in fact be determnined by global conditions in the overall stock market.
Barring a global bear market is stocks, it seems reasonable to suggest that six to nine months from now, we will look back and see that somewhere around here will have been a turning point for the top tier solar companies at least.
A key point is that during such a period of adjustment the higher cost, second tier players will tend to be pushed out and come under considerable pressure. There could well be further bankruptcies in the sector. However, such a process of creative destruction will of course also help the sector to re-balance.
This point is also illustrated clearly once again by the latest margin data from SolarBuzz:
"Gross margins for vertically-integrated Chinese tier 1 cell and module manufacturers decreased two percentage points Q/Q in Q3'11, while Western and Japanese manufacturers dealt with negative margins for the second quarter in a row. Margins for Chinese tier 2 and other Asian producers tracked by NPD Solarbuzz are also negative now."
In response to these pressures resulting from over-supply in the industry we had previously been recommending staying away from solar stocks until very recently. However, recently we decided to test the water with a basket of tier one Chinese players, for anyone willing to hold through what is likely to continue to be a volatile period.
Consequently, since late November we have been recommending specifically being long a basket of Suntech Power (NYSE:STP), Yingli Green Energy (NYSE:YGE) and Trina Solar (NYSE:TSL). More recently, we added First Solar (NASDAQ:FSLR) to that list. We continue to believe that this basket makes sense from a long-term buy and hold perspective.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.