Will U.S. Recession Lead to Solar Depression?

Investors have been fretting about a U.S. recession for months, and recent polls suggest a heightened level of economic anxiety among Americans. Assuming that we go into a mild recession, is this the time for solar investors to jump ship? To the contrary - a recession might provide some attractive opportunities in the solar sector.

A recession may boost the supply of polysilicon

Some analysts suggest that a global recession might lead to lower capital spending among the service industries, especially the beleaguered banks, which represent a significant amount of demand for semiconductor material. Going by this logic, it is possible that a recession may indirectly contribute to the growth of the solar industry by freeing up more polysilicon for the solar market. This trend may benefit polysilicon plays like SPWR and ESLR, but have limited impact on the likes of FSLR. Since FSLR is a thin-film producer, silicon plays no role in their expansion plans.

A recession will lead to lower interest rates, which may support the expansion of the solar industry. There are about 50 polysilicon plants waiting to be constructed worldwide, and they are all competing for financing.

A pullback in oil prices may hurt solar prices in the near-term

Several commentators think that a recession would lead to a correction in oil prices. They argue that a recession would reduce demand for oil, lowering oil prices and driving down valuations of alternative technologies like solar. This line of thinking might be overly simplistic, as the relationship between oil prices and solar is not as clear cut as this. T.J. Rodgers, the impressive CEO of Cypress Semiconductor, the parent company of SPWR, recently questioned the link between oil prices and solar. "Only about 6% of power is created with oil so it shouldn't be connected (to solar)," he said. "But the fact is, people who want solar power want to make the world a greener place and are very concerned about oil. So people who buy it – do so to make the world a greener place. But solar and oil really aren't that well connected."

A pullback in oil prices may hurt solar prices in the near-term, but it's largely unjustified over the long term. The difference between $95/bbl and $100/bbl is purely psychological, and does not have a material impact on the fate of the solar industry. Oil prices would have to fall materially from current levels to have a long-term impact on the solar sector. A dramatic correction in oil prices seem unlikely, as most of the incremental demand for oil comes from China, India and the Middle East, where the prices of petrol and diesel are subsidized or capped, leaving drivers with little incentive to cut back. Until the governments concerned start making consumers pay the market price, appetite for oil is likely to remain strong.

"While a slowdown in economic growth could hurt demand, it could also spur investment in commodities [like oil] as a hedge against inflation and a weak dollar," said Katherine Spector at JPMorgan. "One lingering risk to our view is that investor allocations to commodities broadly and oil specifically could exceed expectations."

Only a sustained recession could hurt the solar industry

A short recession will likely have a limited impact on the solar industry, as many cell manufacturers have multi-year backlogs. Morgan Stanley, in a recent note to clients, explains why the recession is expected to be short: "We continue to expect that the downturn will be comparatively mild and short; after all, recessions abroad are unlikely, so global growth will still be a prop; US excesses are modest away from housing, and peaking inflation should give the Fed latitude to ease monetary policy further. However, the slide in job growth hints at near-term downside risks."

A final word: Solar is not a safe-haven

Some investors prefer safety in times of recession, and solar is still in its infancy and not regarded as a safe investment. Several investors have made it big with solar in 2007, and a recession could be a catalyst to take some profits at the turn of the tax year. The extent of profit-taking will probably depend on the expected duration of the recession. Assuming that we have a short recession, there may be some short-term opportunities in the solar sector if profit-taking becomes excessive.

Disclosure: None.

Comments

[Michael L:]

Are you suggesting that the only thing restraining growth is the lack of raw material? I think not. As far as the point of oil prices driving solar usage, again, I disagree. As much as oil prices, it is the mass hallucination that the world is going to turn to cinders due to global warming. Though many governments have bought global warming in full and no evidence to the contrary will change that, a recession of any magnitude will put environmental concerns on the back burner. The Solars are a great long term investment but they are overdone at the moment. In my opinion, a recession will change their valuation for the worse.


"Excesses are modest away from housing"? Really? Credit card debt is not excessive? Savings are not next to nil? Most Americans are not about 6 months away from financial insolvency? All of which are very likely to be exacerbated in any kind of downturn.

2008 Jan 14 02:02 PM

[User 124892:]

With Bush, mouthing off in the mid-east, all he is doing is driving speculators to drive oil prices higher along with other commodities.
It would be nice if the president carried a big stick, but kept his mouth shut. Every time he opens it up he ends up with hoof in mouth disease.
There won't be any long stock market rallies this year. We the world are in a depression, not a recession. In 2008 there will be a sharp decline in stock prices and corporate valuations. The public is broke, jobs that pay well are scarce. NAFTA, has destroyed the middle class workers in the United States and Mexico. This giant bubble is deflating, the present administration says buy more, which is wrong. The president should be encouraging, the public to save. The consumers is up to his and her eye balls in debt. The banks are up to their eye balls in debt, praying that foreigners will bail out American banks. Washington needs to realize that people aren't going to pay their debts anymore than the federal government. The only difference is that the federal government can run the printing presses around the clock. Which some where down the road means that a loft of bread will cost a wheel barrel of government ;printed green backs. It doesn't look good economically for the country.

2008 Jan 14 02:15 PM

[Living Off ...:]

FSLR sports an 18 billion dollar market cap on revenues of $350m and net profit of $30 m.

it should probably be worth a third. it also seems heavily dependent on subsidies from the German government.

2008 Jan 14 04:09 PM

[Seadrive:]

Things always look better or worse than they really are. I don't believe a typical U.S. resesion will hurt the solar industry much, if at all, but the highest flying overpriced solar stocks will take it on the chin. Not because of a solar industry resession, but because today's prices will look even more rediculusly high in a bear market. I expect these "gambling money" stocks will be the first sold to meet margin calls. Having said that, when I see a bottom put in, or the next breakthrough in pannel efficiency, I'm backing up the truck. Solar power makes too much sense to go away.

2008 Jan 14 04:59 PM

[Winston Kotzan:]

It does not matter how good the fundamentals are on solar. What matters the psychology of institutional investors. Right now these stocks are overheated, and if we get a bad enough recession, people are just going to pull out of high-multiple stocks across the board. It's just plain sector rotation coordinating with the business cycle.

2008 Jan 15 11:55 AM

[dbc64:]

With significant economic uncertainty, big box retailers are unlikely to spend precious capital on discretionary projects nor are they going to want to make long term commitments for power purchase agreements.

There is a lot of supply coming online in 2008. Any demand hiccups could cause panel prices to plummet. Solar power will has a bright longterm future, but near term stock performance could be ugly

2008 Jan 15 03:17 PM

[Monkey:]

No way. The whole reason why people buy panels is so that they can 1/2 their electricity bill.

Doesn't matter, recession or not...in fact, a recession might increase sales b/c then there will be more people wanting to lower their electricity bill.

Duh.

2008 Jan 16 10:33 PM

[gebby:]

despite the conditions in the overall economy investment in solar will continue unabated. the move to solar is cost savings for business and residents. and the effort is driven by a societal push worldwide to address the carbon in the atmosphere which is known to cause global warming. anyone that thinks global warming is not the result of man is wrong. there is no conspiracy to the contrary. so what is an investor to do? in this environment of economic uncertainty at least we know the solar industry will remain robust. efficiencies are growing all the time. and most of the companies traded bring different strengths to a diverse portfolio of alternative energy stocks. degrees of efficiency of the panels also exist. 8% for first solar to 18% for ascent solar(asti).

stay invested. these are businesses. with each market sell off these stocks are higher. take note.

2008 Jan 19 09:31 AM

[1000plusper...:]

"This trend may benefit polysilicon plays like SPWR and ESLR"

I couldn't agree with this more.

2008 Jan 26 08:58 PM

[sirfisup:]

Although your article was published in January I believe it has strong merit. I believe that solar will be the beneficiary of extended tax credits and because of the recent heightened awareness about escalating oil prices more pressure is being placed upon our goverment representatives to get something done especially with an election year around the corner. I doubt that many in the house or senate want to be known as obstructionists in helping our nation ween itself off Middle East oil. Although the solar industry is extremely volitile the companies that play in this space are all reporting record sales and profits. The recent discussion of lower subsidies in Spain and Germany has caused a major and unjust pullback and many of the analysts that cover the sector have also said that there are major free cash flow problems with many of these companies and that they will not be able to expand production because of the tightening credit markets. I don't foresee this to be a problem for there is sustainable demand for solar well into 2010 and beyond and with silicon prices soon to come down it will significantly increase the adoption rates and bring solar to grid parity no later than 2012. Any disruptive technology that offers significant benefits will most certainly have its infancy problems just like any major industry that gets off the ground. Fact is that major venture capital is pouring in at record levels and huge technology companies like Intel, IBM, Applied Materials just to name a few are rushing in just like the miners did during the gold rush. More and more large solar projects are coming online and more are being contracted with major utility companies and it is just a matter of time before every major oil company with the exception of BP and Shell will recognize that "if you can't beat them then join them"

2008 Jul 11 08:31 PM