|From CS yesterday: |
Solar supply-demand, cash flow, and subsidies update
We are updating our global solar supply-demand model following earnings. We reiterate our view that severe excess supply will persist, with 38GW of production potential vs only 27GW of demand. As a result, we continue to see prices approaching cash costs and utilizations declining. Rationalization of industry capacity through forced consolidation will mark the bottom in the industry. We are more cautious on FSLR given significant cost reductions from Chinese solar companies. In addition, we have updated our cash burn analysis – the industry generated positive cash flow in Q4 - consistent with historical seasonal patterns (see charts). We have updated our views on recent subsidy news in Germany (continue to view this as a negative), as well as report on the impact of net metering policy in California.
We see 38GW of supply potential in 2012. On the positive side, large poly companies are finally starting to curb their expansions - GCL noted for the first time in several calls that it will not expand its capacity further beyond the 65k reached at the end of 2012. OCI has moved more slowly on its P4 expansion and has not decided yet on P5. MEMC has announced a shut down of its capacity in Italy. Corning commented on its call that Hemlock will cease certain expansions. YGE wrote down its poly plant. DQ is delaying the 1700 ton Wangzhou upgrade for hydrochlorination for one year from previous plans of 3Q12. However, some projects still appear to continue - MEMC thus far has not cancelled its Samsung JV; GTAT booked strong orders for poly in C2H11; Renesola has announced it will expand capacity. As a result of these changes, we are now modeling 234k tons of potential poly production in 2012 vs prior model at 238k tons. We now expect only 1600MW of production from FSLR vs 2250MW prior to earnings. Including FSLR volumes, this will result in a supply potential of 38GW in 2012.
Demand update - see 27GW of demand in 2012.
Our demand estimate of 27GW for 2012 remains unchanged post earnings. We are modeling 3.5GW in demand for Germany in 2012, vs 7.5GW in 2011. Note that there is some uncertainty on 1Q12 Germany demand - if this were strong, there could be some upside to our numbers for 2012. However, going forward, we view changes in the German market as a weakness for the industry. Japan is likely to emerge as a potential positive swing factor to our models - we are modeling 2.25GW in 2012 for Japan. We recently hosted CSIQ mgmt in our offices and company was optimistic on Japan, noting that the subsidies picture in Japan will be clarified around April. China is another swing factor - we are modeling 6GW in 2012, vs 2.9GW in 2011. Our 2012 estimate is well above consensus views of 3-5GW. However, on a bottom-up basis, we note that there are several companies with ambitious plans for China. At this time, we view our 27GW estimate as a fair balance of the potential demand environment in 2012.
Expect prices to continue to remain weak.
The mismatch between supply and demand will continue to make pricing weak. In particular, we think that poly prices will reach $20/kg levels by summer time; note that poly has declined from Feb $30/kg peak levels in 2012 already to $26/kg now. We think tier 1 poly companies likely are building inventories already - and will soon start to cut utilizations. While most of the industry trades at a discount to book value, poly companies in some cases are still trading at a significant premium to book values. Panel prices were about $1/W in 4Q11, and have been guided to a range of $0.85-1.00 (excluding SPWR) in 1Q12, with an average of $0.93 by Chinese companies. At this time, we think visibility on 2Q12 is very low - and we think pricing ranges anywhere between $0.80-0.97/watt in 2Q12. We think this level is very difficult for FSLR to compete, as FSLR’s cost is ~73c/watt and there is usually a 10-20c/W penalty for FSLR panels.
Cash burn analysis.
As we do every quarter, we report on cash flow metrics for our companies. For this analysis we have looked at TSL, SOL, JKS, FSLR, JASO, CSIQ, YGE, WFR, SPWR, CSUN, and STP. Free cash flow was $556mm in 4Q11 vs ($433mm) in 3Q11; trough free cash flow was ($1.5bb) in 1Q11. For the full year 2011, the set of companies burned $2.2bb in cash flow, vs $90mm in 2010. We expect 2012 could benefit from lower capex (2010 capex for this set of companies was $2.9bb, 2011 was $4bb, we expect sharper declines in 2012) - however, the industry is finally in complete oversupply this year - so operating cash flow generation will likely be very difficult.
Oversupply likely to persist in 2012 in spite of a slow down in polysilicon capacity expansions
GCL has no plans to expand capacity in 2012 beyond the YE11 capacity of 65k tons.
YE11 capacity of 65k tons was in line with guidance of 65k tons by YE11. 3Q11 comments indicated 65k tons of capacity would be reached by YE11 ahead of the mid 2012 target. It is a positive sign that the largest and one of the lowest cost and lowest capex manufacturers of polysilicon has decided to halt capacity expansions. While polysilicon oversupply is likely to persist in 2012, if manufacturers halt expansions in 2013-2014 and low system prices continue to drive demand, investor interest in low-cost solar manufacturers may return in the long run.
GCL production below guidance.
In spite of strong YE11 demand in Germany and the US, GCL’s low cost structure, and the earlier-than-planned capacity ramp to 65k tons, GCL 4Q11 production was below guidance, indicating even GCL may have had difficulty selling poly with oversupply conditions. GCL 4Q11 production of 11k tons (up 72% q/q) was below implied guidance of 12.6k tons (up 108% q/q). Recall that OCI is moving more slowlythan planned on the 20k ton P4 expansion (originally targeted for YE12) and has not made a final decision on P5 (originally targeted for YE13). Procurement and engineering for P5 will have to start by May 2012 to keep the original plan for P5. In Nov 2011, OCI completed the 3.7 debottlenecking for 7k tons. OCI operated near full utilization in 4Q11 and reached 42k tons of capacity. Corning management commented that Hemlock will halt certain future capacity expansion plans(probably after 2012 expansions). REC 2012 production guidance of 20.5k tons is up only 8% per year. In Oct 2011, REC Silicon put expansion plans on hold. DQ is delaying the 1700 ton Wangzhou upgrade for hydrochlorination for one yearfrom previous plans of 3Q12 as it would not generate pos FCF. Wacker, however, iscontinuing with the 15k ton Nunchritz capacity ramp by 2Q12 and 18k tonTennessee facility by late 2013.
Poly oversupply is likely to continue in 2012with an estimated global solar poly + FSLR production of 38GW vs 27GW of demand. However, we believe 2013-2015 polyproduction may remain flat, leading to an eventual improvement in supply demand balanceas demand increases. In spite of a slight decrease in our polysilicon production estimate,have increased our 2012 supply estimate from 36GW to 38GW due to faster thanexpected declines in polysilicon usage per Watt to 5.8 g/W from 6.4 g/W in our previousmodel. Some companies have reported current usage of 5.5 g/W.
Will GCL be able to sell wafers below 25c/W by YE12 as CSIQ has predicted?GCL has entered into long-term wafer supply agreements below 30c/W and may sell wafers below 25c/W by YE12, according to CSIQ. GCL YE11 poly cost of $18.6/kg and wafer processing cost of 13c/W imply a total wafer cost of 23c/W (assuming 5.5g/W). With further cost (and maybe margin) reductions, YE12 wafer prices below 25c/W are possible. Recall that CSIQ predicted aggressive YE12 all-in module costs of 55-60c/W, down from 74c/W in 1Q12, in part enabled from cost reductions in wafer procurement.
CSIQ all-in module cost target of 55-60c/W by YE12 explained.
CSIQ management explained the roadmap to achieve their aggressive module cost target. The companyhopes to procure wafers below 25c/W from current rates below 30c/W. The company’sbest cell costs are already below 15c/W and their expectation is that soon all lines will bebelow this cost from the current 20c/W. The module conversion cost target of 20c/W fromthe current 25-26c/W may be the most difficult to achieve. The current best line isautomated (rather done by hand) with a cost of 24c/W. Industry checks suggest that themodule conversion cost target is the most aggressive. Also, it remains to be seen if GCLwill sell wafers below 25c/W by YE12, even if their cost reductions are successful to~20c/W.
CSIQ projects are a big deal.
CSIQ has 9 projects totaling 100MW DC in the pipeline in Canada to be sold to TransCanada for C$470mm. Revenue recognition will occur to a small degree in 2012 and largely in 2013. Depending on margin assumptions, the value of the projects may exceed the current market capitalization of CSIQ of $146mm. As other companies have mentioned, CSIQ also expects 3Q12 construction in China to be significant from expected bids in 2Q12.
Polysilicon and module prices have resumed their declines the last 3 weeks.Anticipated incentive cuts in Germany led to a pull-in of demand in 4Q11 and 1Q12. The cuts are likely to occur in April, precipitating new price declines the last 3 weeks.
Seasonally positive 4Q11 free cash flow.
4Q free cash flow is seasonally strong ahead of January incentive cuts, followed by a weak 1Q in general. Shipments in 4Q11 have exceeded guidance in many cases driven primarily by demand pull in from Germany, China, and the US markets ahead of subsidy cuts. This has allowed solar companies to burn inventory, down 14.4% q/q and generate total positive cash flow of $556mm in 4Q11 vs. ($433)mm in 3Q11, and negative cash generation in 2Q11 and 1Q11. 4Q11 capex was down 43% q/q. 1Q12 may show strong shipments (contrary to prior years) before additional FiT cuts in Germany and US tariffs in the US, followed by a weak 2Q12.
Note that 4Q11 marked the first quarter since 4Q10 that net debt declined for solar manufacturers in aggregate that we have tracked. However, LDK is yet to report. Many manufacturers have put capacity expansion plans on hold and have restructured to reduce opex. YGE and SOL, however, are increasing capacity rather aggressively in 2012.
The potential for unsubsidized power purchaseagreements in Germany after deep incentive cuts
News flow indicates a compromise on solar policy in Germany will lead to deeper
cuts of 20-40% vs the 20-30% previously planned.
Feed-in-tariffs (FiT) reportedly will only be paid for 80% of electricity production from small plants and 90% from large plants.Max annual cuts will now be 29%, up from 24%. One positive point is that small projectsregistered before Feb 24th will have until June 30th to be completed and large projects,until Sep 30th. The prior agreement for FiT cuts had been worse than expected, and thisagreement appears to have created even deeper cuts. However, we expect thedevelopment of unsubsidized power purchase agreements in Germany.The potential for solar power purchase agreements (PPA) in Germany due to highretail rates.FiT rates of E19.5c/kWh (for systems below 10kW under the previous plan) are now well below household retail electricity rates of E26c/kWh, making PPAs possible and likely. Residential solar project owners can use part of the solar production to supplement their own usage and sell part (up to 80%) to the utility for FiT. PPAs arerelatively new in Germany and may take time to develop. Grid parity for residentialelectricity would especially benefit from net metering, but is not clear if net metering ispossible under the current compromise. Also, low but reasonable system prices of E1.7/Wor less would enable an unsubsidized solar LCOE on par with industry retail rates of E12-13c/kWh. As mentioned, FiT rates will be paid for 90% of electricity production from largeprojects.
Net metering cap, a risk to residential andcommercial solar installations in California
We have noted that the rooftop market is one of the most attractive markets for solar in theUS, as after subsidies, cost of energy will be below "grid parity" in many markets. Netmetering benefits electricity consumers that own solar facilities by allowing them to use thegrid effectively as a battery - feed excess energy when not needed, and draw energy whenneeded. For utilities however, more distributed generation poses some challenges - takesaway revenue streams, but also forces consumers without self generation to pay adisproportionate amount of the transmission and distribution charges, as currently bothT&D as well as generation costs are all rolled into one tariff per unit of electricity (the tariffcan vary based on time of day or total consumption in a month). While utilities areincentivized to oppose increases to net metering caps, solar installers are incentivized tolobby for higher caps. We note in this report that without a new calculation of net meteringpenetration or a change in the cap, new residential and commercial solar installations inCalifornia may be at risk after 2012. The 5% cap on solar installations with net metering inCA implies a 2.4GW maximum cumulative installations. Current cumulative installations of1GW (41% of cap) may reach the cap in 2014 (assuming the 2011 growth rate of 70% innew installations). With the current calculation method, PG&E could hit the cap in the next15-18 months based on reserved projects. SCE and SDGE could take 1.5-2 yrs.Greentech Media, however, claims the cap may be reached as early as late 2012 (under a"high growth" scenario).
The solar energy industries association (SEIA) is lobbying to have the calculationmethod changed, leading to a new cap of ~4.6GW while keeping the 5% penetrationlimit.Under a high growth scenario, this would extend the program another year, according to SEIA. The net metering cap has been increased twice in the past, from 0.5% to 2.5% and since then to 5%. Without another increase or a change in the net metering calculation, or implementation of a "fee" for net metering, new residential and commercial installations may be curtailed as soon as late 2012, and will be a factor to watch. SPWR,YGE, TSL, and STP have exposure to the CA residential and commercial markets.
Net metering is like a free battery.
Net metering allows solar owners or lessees to upload excess electricity to the grid during the day for a kWh credit and then consumergrid electricity at night. Instead of net metering, solar homeowners could invest in storagelike a battery, dispose of the excess electricity, or install smaller systems, none of which isas attractive as net metering. The net metering cap has been raised twice in the past andmay be raised several times in the future. Utilities have asked for the cap out of concernfor grid management of intermittent electricity production from solar.The CPUC has just started to review the possibility of a new calculation ofpenetration allowing for more MW under the program.The new calculation method requested by the industry would raise the cap to ~4.6GW from ~2.4GW. The CPUC recently issued an RFP to study the effects of net metering and expects results from the report near YE12. With the current calculation method, PG&E could hit the cap in the next 15-18 months based on reserved projects. SCE and SDG&E could take 1.5-2 yrs. The the CPUC will attempt to encourage solar adoption while balancing the subsidy burden on other rate payers who pay for a growing portion of other generating assets. future of net metering and subsidies for distributed generation is uncertain. We believe thatWith or without net metering, residential solar will make sense.The industry is lobbying to increase this cap – but the outcome that we believe is quite likely, is thatutilities charge a fee for net metering. We estimate that the NPV of net metering is~$4,740 or $1.35/W for a 3.5kW AC residential system in San Jose, CA with 900kWh permonth in total usage (grid + solar). In year 1, this value of net metering is ~$42 per month.If utilities were to charge a potential net metering fee of $1.35/W and if project ownersincluded the fee in the system price, the ITC and accelerated depreciation could bring theout-of-pocket value ~70c/W. If the net metering fee is higher, we think solar may still makesense without net metering – even if the excess production is wasted!
Sophisticatedinstallers could even consider offering solutions that link the solar systems to “smartappliances” that switch on (e.g., a dishwasher or washer/dryer) when there is excess solarproduction thus minimizing wastage. The value of electricity storage will also increase inthe absence of free net metering.
US solar tariffs have begun – preliminarydetermination of China subsidy rates relatively small
The US preliminary countervailing duty (CVD) on China solar cells and modules will be 2.9% - 4.73% based on subsidies in China. These subsidy rates may be lower than expected, resulting in the uptick in stocks after the announcement. While these CVD rates are relatively small, the determination of anti-dumping, scheduled for May 17, 2011, may lead to much higher tariffs. The alleged dumping rate is 50% - 250%.
What’s next for tariffs?
The preliminary subsidy rate of STP was 2.9%; TSL 4.73%; and all others 3.61%. The US customs and border protection will begin collecting at these rates going forward and 90 days retroactively. The announcement reveals that the US is willing to levy tariffs against China solar manufacturers, albeit at low CVD rates. As mentioned, much larger rates for anti-dumping may be announced on May 17th. The Department of Commerce will make its final determination in June 2012; International Trade Commission, July 19; and the issuance of order July 26. Note that SolarWorld has circulated a petition to initiate a similar investigation in Europe against China solar manufacturers. We believe that most China-based solar companies have been circumventing the retroactive tariffs by processing cells and modules in Taiwan or elsewhere outside of China for US shipments, possibly adding 5c/W vs manufacturing in China. China-based manufacturers are likely to keep their low cost leadership if 5c/W is the only addition from the tariff process. This circumvention through Taiwan may work to supply the US and some of Europe in the case of tariffs. Cell and module capital intensity is the lowest of the value chain in solar manufacturing at ~20c/W and 5c/W vs 20-60c/W poly and ~40c/W wafer. Manufacturers may add more debt to expand cell and module capacity outside of China for the US and Europe markets, if necessary.
Preliminary Subsidy Rates:
PRODUCER/EXPORTER SUBSIDY RATE
Wuxi Suntech Power Co., Ltd.2.90 %
Changzhou Trina Solar Energy Co.,
All Others 3.61 %
EVENT CVD INVESTIGATION
Petition Filed October 19, 2011
DOC Initiation Date November 8, 2011
ITC Preliminary Determination December 5, 2011
DOC Preliminary Determination March 19, 2011
DOC Final Determination* June 4, 2012
ITC Final Determination** July 19, 2012
Issuance of Order*** July 26, 2012
(Price as of 26 Mar 12)
Canadian Solar (CSIQ, $3.33)
China Sunergy (CSUN, $1.94)
Corning Incorporated (GLW, $14.02)
Daqo New Energy (DQ)
Dow Chemical Company (DOW, $35.02, OUTPERFORM, TP $40.00)
First Solar (FSLR, $26.11, NEUTRAL [V], TP $30.00)
GCL Poly Energy (3800.F)
JA Solar Holdings (JASO.OQ, $1.77, NEUTRAL [V], TP $2.00)
Jinko Solar (JKS, $6.59, NEUTRAL [V], TP $10.00)
LDK Solar (LDK.N, $4.35)
MEMC Electronic Materials Inc. (WFR, $3.91, OUTPERFORM [V], TP $5.50)
OCI Company Ltd (010060.KS, W238,000, OUTPERFORM [V], TP W323,000)
PG&E Corporation (PCG, $43.39, NEUTRAL, TP $45.00)
ReneSola Ltd (SOL.N, $2.67, NEUTRAL [V], TP $2.50)
Renewable Energy (REC.OL, NKr3.58)
Samsung Electronics (005930.KS, W1,275,000, OUTPERFORM, TP W1,490,000)
San Diego Gas and Electric (SREE)
SoCal Edison (SCE)
Solarworld (SWVG.DE, Eu2.95)
SunPower Corp. (SPWR, $6.80, NEUTRAL [V], TP $8.00)
Suntech Power Holdings Co., Ltd. (STP.N, $3.19, UNDERPERFORM [V], TP $2.50)
Tokuyama (4043, ¥257, NEUTRAL, TP ¥270, MARKET WEIGHT)
Trina Solar Ltd (TSL.N, $8.09, NEUTRAL [V], TP $8.00)
Wacker Chemie (WCHG.DE, Eu69.61)
Yingli Green Energy Holding (YGE.N, $3.91, NEUTRAL [V], TP $5.00)