Not only is solar energy abundant and free, it also has started to reach grid parity in most parts of the world. By 2030, the solar industry is expected to generate over $5 trillion in cumulative revenue. Solar demand is expected to reach 65 GW in 2016, up from ~59 GW in 2015. While most parts of the solar supply chain continue to witness price pressure, there is one part which has been seeing slow but steady increase in prices. Solar wafer prices have increased by ~10% in the last 6 months due to a shortage in capacity.
Solar wafer manufacturing is a relatively more capital intensive business when compared to module manufacturing. Many large solar panel companies have opted to buy wafers from third parties rather than manufacturing them in-house. In the last couple of years, major companies such as JinkoSolar (NYSE:JKS), Trina Solar (NYSE:TSL) and others have focused mainly on expanding cell and panel capacities. This was done to conserve capital as manufacturing wafers in-house did not yield any additional margin benefits. This has put the existing wafer players in a favorable position when compared to cell and panel players. Low wafer prices during the last downturn had led to an almost complete halt in expanding wafer capacity. There also was consolidation around major players. The erstwhile solar wafer leader LDK Solar is now bankrupt. The bigger wafer producers like GCL Poly (OTCPK:GCPEF), ReneSola (NYSE:SOL) and Green Energy Technology are the main beneficiaries of this trend.
ITC extension has boosted solar demand in US
The US and China are the biggest solar markets globally. The investment tax credit renewal in the US is expected to play a major role in boosting solar installations across the US. According to SEIA, solar installations have grown by 76% CAGR since the implementation of ITC in 2006. A further extension will allow solar power to hit the 95GW mark by 2022, enough to power 19 million homes. The industry is set for double-digit growth, with total solar investment in the US predicted to be more than $124 billion during 2016-22.
The solar wafer is an important element involving a capital intensive process
Wafer manufacturing is now concentrated in China and Taiwan owing to low land and capital costs. Wafer is an important raw material for manufacturing solar panels. With demand for more efficient solar panels increasing, there has been a higher demand for better raw materials. IHS predicts that there might be a shortage of solar wafer supply in H1 2020 as well. This would lead to higher prices and thus the existing players like GCL, Longi, ReneSola will benefit.
What companies are the major wafer producers?
GCL Poly through its massive 14 GW solar wafer capacity has forced wafer prices to a very low level. The company has been successful in achieving low cost and large scale, pushing the smaller wafer makers out of the market. GCL's new FBR technology also will help in manufacturing higher efficiency wafers that go into further producing high efficiency panels. Technology innovations continue with the S4 multicrystalline wafer launched in May 2015, having an average efficiency of ~18.3%. ReneSola is another major producer with a presence in solar cell and panel manufacturing. Though the company has started to focus on project development, it will benefit from its large gigawatt wafer manufacturing capacity. ReneSola shipped 341.6MW of wafers in Q3 2015, which increased 70% on an annual basis. GCL's new FBR technology also will help in manufacturing higher efficiency wafers that go into further producing high efficiency panels. Technology innovations continue with the S4 multicrystalline wafer launched in May 2015, having an average efficiency of ~18.3%.
Other than these companies, other mainstream solar panel players like Trina Solar, JinkoSolar, JA Solar (NASDAQ:JASO) and Canadian Solar (NASDAQ:CSIQ) also have large solar wafer manufacturing capacities.
Chinese imposition of duties on poly imports will further benefit vertically integrated producers
China's polysilicon processing trade policy has helped many polysilicon companies in Europe and Korea to export huge quantities of polysilicon into China. This policy circumvented the anti-dumping duties that China had imposed on European, Korean and US producers. This oversupply had played a major role in pushing polysilicon prices down. However, China's Ministry of Commerce has now decided to exercise stringent control on the trade-processing loophole, which should decrease the volume of imports in China. This should benefit integrated wafer and poly producers like GCL and ReneSola.
Risks for these companies
a) Solar companies are starting to increase wafer capacity
Existing solar companies are gradually expanding, eyeing the uptick in wafer demand in anticipation of high solar installations in the coming years. Trina Solar currently has 1.8 GW for wafers and 2.3 GW for ingots. Canadian Solar too has plans to expand wafer capacity from 400 MW currently to 1 GW in 2016.
Wafer and Ingot Capacities (in GW)
GCL and Longi too have plans to expand wafer capacity by another 1 GW and 500 MW by 2016.
b) China Slowdown might have a negative effect on solar demand
China is the biggest source of solar panel demand with ~15 GW of solar capacity installed in 2015. The country has ambitious plans for expanding into solar going further. The risk lies in the fact that the country is currently facing a major slowdown. If the slowdown continues for long, it might lead to slower demand for solar products as well. However, China's focus on clean energy to fight its climate change means that solar growth will continue despite the overall economy slowing down. Another major downside for both ReneSola and GCL is their high debt to equity ratios. If risk aversion sentiment increases, then the stock could get hurt disproportionately.
Wafer producers have in general continued to suffer from low margins and profits, even as the panel producers have turned profitable. This has resulted in inadequate wafer capacity expansion by wafer focused companies as they did not have any incentive to invest. Major solar panel companies also have not expanded their ingot and wafer capacities in proportion to their cell and module capacities. This has led to a tightness in the wafer part of the supply chain. This will allow major wafer producers to benefit from increasing prices, even as their costs decline due to improving technology. I think it may be a good time for investors to look into buying some of the major solar wafer stocks as the global solar demand is expected to expand in the coming years.
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