Solar Market Yet to Hit Rock Bottom

More evidence the solar market has yet to bottom out. According to researcher iSuppli, inventories across the industry — from polysilicon to solar modules to wafers – rose 64% in the first quarter of 2009, compared to the same period last year. That’s down to a major oversupply as companies bring new manufacturing plants online. Falling demand, particularly in the once thriving Spanish market, also has exacerbated rising stock levels.

With so much inventory lying around, prices that companies can get for their goods are set to fall even lower. iSuppli reckons polysilicon spot prices (inventory bought on the open market instead of on long-term contracts), for instance, will drop to $50 per kilogram by the end of the year. That would represent a 72% drop from the $180 per kilo prices recorded at the beginning of 2009. Research by consultants New Energy Finance also shows many long-term silicon and wafer contracts negotiated in 2007 and 2008 have now been cancelled or renegotiated.

“With new polysilicon capacity coming online this year, the [photovoltaic] industry will suffer further price erosion, at all nodes of the value chain,” Henning Wicht, principal analyst at iSuppli, said in a statement.

So what does that mean for companies in the solar industry?

For some, lower prices are going to hurt. That's certainly the case for so-called fully-integrated players: firms that manufacture goods (polysilicon, wafers, and cells) across the supply chain. Falling prices mean companies' margins will be squeezed, while overall revenues could fall. iSuppli highlights Norway's REC, China's Yingli, and Germany's SolarWorld for particular attention. On July 27, SolarWorld reported a 30% drop in first half pre-tax profits to €83 million ($117 million). The company, though, did reaffirm its target of €1 billion ($1.4 billion) revenues for the calendar year.

Yet one man's pain is another's gain. The contraction in solar prices should make it more cost effective to install panels on anything from huge arrays in Arizona to home roofs in Saxony. Government support for the industry, including a recently-announced Chinese plan to subsidize 50% of investment for solar power projects, also should cut costs even more.

The fallings prices are good news for solar supporters and their ongoing attempts to achieve grid-parity. It also could help solar companies in the long run. For sure, lower costs now will hit bottom-lines. But if more people can afford to install PV panels, then the upswing in demand could help offset the mounting inventory levels. That, in turn, may help to jumpstart the industry as a whole.