Seeking Alpha
Profile| Send Message|
( followers)  

I've made my case for the difficulties in investing in the solar sector the next few years until the "great shakeout" [The Long Term in Solar]. In fact, for the fund, my 2 biggest money losers thus far are in fact solar stocks, so sometimes I should listen to my own advice better. While I do believe speculators will be back in these stocks once the market stabilizes and we'll see some tremendous shorter term moves, from what level is the open question.

I do believe many investors have been looking at the "very long term", in which solar is obviously a viable alternative, and missing the real potential problems in the "near to middle term". I also believe many investors simply miss the sheer number of non public panel makers out in Asia; people newer to the sector think the 10 or so publicly traded solar makers are the majority of the industry... unfortunately, for competitive reasons, there are simply too many players in what is still a limited end market.... many many private companies.

Further, as many of the market forces buffet the sector, the open question is will each incremental dollar of revenue bring less profit, especially for the vast majority who are tied to polysilicon. An interesting conundrum and again, as I keep repeating, I found the solar sector much easier to invest in about a year ago (and I assume it will be much easier in about 3-4 years after the necessary shakeout), but between now and then I expect continued extreme volatility and some great trading opportunities if one can time things properly - always a difficult thing to do.

Much like the internet, or as I've drawn in comparison in the past, the global fiber buildout, I think there will be a boom/bust/echo boom play out in this sector. We are just now at some stage between the initial boom and coming bust. And those companies who survive this stage will have a much bigger playing field with far fewer competitors; so eventually it will be quite an investment with a "lot less" worries. But this will take years... not months, not quarters, to fully play out. I expect a lot of blood and as I've written before (at much higher prices). I expect a few companies that have been speculators' darlings over the past 6 months to be on the pink sheets or completely out of business within a few years.

Greentech Media has an article out about the sector

  • It's been a rough-and-tumble ride for many public solar companies lately. And the solar industry had best prepare itself for further hardships, according to a panel of Wall Street experts at Greentech Media's Solar Market Outlook conference in New York on Tuesday.
  • "There is going to be shakeout in the market," said Jesse Pichel, a senior research analyst at Piper Jaffray, who predicts that a module oversupply will drive prices down.
  • According to Pichel, the winners will be the companies with the lowest cost per watt. Right now, the low-cost leaders are First Solar and "a couple of folks in China," he said.
  • Pichel also pointed to silicon manufacturers as possible future winners. Even as silicon suppliers rush to add new production capacity, he said some solar companies will be forced to lower their guidance in the middle of the year because there just won't be enough of the precious stuff to go around as companies continue to make more panels.
  • And that will keep margins pinched, even if the solar industry hits grid parity, the point when solar is competitive with conventional electricity, he said. "Margins for polysilicon vendors will be 50 percent less," he predicted.
  • Stephen O'Rourke, a managing director at Deutsche Bank Securities, expanded on the idea. In his view, a larger supply of silicon at the end of next year will lead to "a flood of polysilicon-based modules" hitting the market. That flood, in turn, will lower prices precipitously, squeezing margins and challenging balance sheets, he said.
  • O'Rourke forecast an industry shakeout -- starting with crystalline-silicon-based panels and spreading to thin films -- that could last two or three years. (agree 100%)
  • So solar companies need to start jockeying for survival starting now, he said.
  • "All the companies out there need to think very, very carefully about how they will position themselves for a shakeout to take advantage of the real opportunity, which is not going to hit for another five or six years," O'Rourke said.
  • To be safe, crystalline-silicon-based solar-panel manufacturers need to lower costs until they are able to profitably sell panels for $2 per watt, said panel moderator Travis Bradford, president of the Prometheus Institute and a Greentech Media partner. Thin-film manufacturers need to reach profits with $1.50-per-watt prices, he added.
  • If they don't, companies could find themselves trapped with low margins and unable to raise money to expand and reinvest, Bradford said.
  • "We've seen over the last couple years a lot of big promises from solar companies that have not delivered," he said "We have seen a lot of polysilicon startups from companies that have zero experience and zero financing in the field. And quite frankly, we have seen a lot of smoke and mirrors regarding public-company polysilicon supply. And it's pretty distressing."
Source: Greentech Media: Solar Sector Headed for a Shakeout