Will U.S. Recession Lead to Solar Depression?

by: Eben Esterhuizen

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.