Tickers in this Article: JASO, LDK, STP, YGE, SHCAY, QCLSF
Shares of China-based solar panel companies JA Solar Holdings (Nasdaq:JASO) and LDK Solar (NYSE:LDK) saw their shares fall sharply earlier this week as both companies posted worse than expected quarterly losses. The disappointing results are a consequence of the massive glut of solar modules and cells now in the market that analysts suggest is unlikely to go away for some time to come.

IN PICTURES: Eight Ways To Survive A Market Downturn

It's a classic boom-bust story. Rising energy prices and growing awareness of the need to do something about global climate change prompted governments to dole out huge financial subsidies to spur solar installations.

Spanish Decline
At the head of the pack was Spain, whose subsidies were so generous that the country accounted for 50% of worldwide solar installations in 2008. A lot of this went into new homes produced as part of Spain's vacation and retirement villa building boom. However, the credit crunch led to a housing market collapse, and Spain's once booming economy now sports an unemployment rate of 19%, double the average in the Eurozone, and more than one million homes remain unsold.

All this suggests that sunny Spain is unlikely to be a source of demand for solar panels for years to come.

Supply, Yes, But Demand?
Yet, despite the collapse in demand, which is expected to be down 17% globally this year, there's no apparent slackening of supply. With more than 200 solar companies now in the market, many of which are start-ups, production capacity has exploded. Total manufacturing capacity will be up 56% this year, and is projected to grow at a rate of 49% a year until 2013.

Asian producers, like Suntech Power (NYSE:STP), Yingli Green (NYSE:YGE) and Sharp Corp (OTC:SHCAF.PK) continue to expand output even as European producers like Q-Cells (OTC:QCLSF.PK) have cut production and laid-off staff.

The net result of this rapid rise in production in the face of slumping sales is a collapse in prices. Module prices have plunged 40% since the beginning of 2009, and according to recent guidance from JA Solar, module prices should fall an additional 5 to 10% during the third quarter. A year and a half ago, the U.S. retail price of a 200-watt module was $1500; it's now under $600.

Optimists argue that this drop in the cost to the consumer should spur demand, but the final economics of installing solar still don't offer much of an incentive to the homeowner. Even with $20,000 in Federal and State grants a tax credits, the $25,000 net cost of solar installation for a typical California home produces a cost of power per kilowatt hour of about 38 cents - triple what the average grid cost is in the state. Moreover, homeowners are unlikely to opt for such a pricey upgrade so long as property values continue to decline.

The Bottom Line
The excess capacity in the market has produced a change in the long-term outlook for the solar industry that doesn't appear to be fully baked into share prices at this juncture. We've all been here before. Remember corn-based ethanol? (For more, check out Spotlight On The Solar Industry.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center