Cyclical Overcapacity in Solar Again?

The solar manufacturing industry especially the solar cell and module parts of the supply chain are seeing large overcapacity, as the Chinese end demand slows down. The last 2 years have been good for the solar industry as large Tier 1 makers have been making decent profits, even as the overcapacity situation had moderated. However, the second half of 2016 has seen the solar panel prices crash down to be low 50 cents/watt, as overcapacity has returned with a vengeance. The overcapacity is more pronounced in the cell and module parts, which had seen a large capacity being built in non-Chinese regions because of the solar trade wars. The polysilicon and wafer parts of the supply chain has remained relatively muted in terms of new capacity expansions, because of the low prices being seen during most part of the “up” cycle.

The solar industry is estimated to make around ~$6 billion in capital investments in 2016, which would be roughly flat with 2015. This is a decently high level for the industry, which has revenue of around $35-40 billion. With many of the solar panel makers seeing low capacity utilization, many of the capex orders may get deferred or cancelled.

Also Read about updated Solar cell and panel cost in India.

Note the solar industry has not totally recovered from the overbuilding during 2010-2012 period, when hundreds of Chinese companies entered all parts of the supply chain. This overcapacity did not go away during the “down” cycle, as the peculiar Chinese capitalistic system does not allow companies to fail in the normal sense. The capacities of failed Chinse solar companies such as LDK and Suntech continue to run under different investors and management, such as Shungfeng. Like other industries such as steel and shipping, huge overcapacity is the industry norm.

Capex to go down

Until the Chinese system undergoes a reset, solar manufacturing will never be a “normal” industry as such. The effect of this overcapacity will be much more pronounced on small Tier 2 Chinese solar cell and panel companies, which cannot export to USA and Europe and also do not have a good marketing and distribution chain across different regions of the world.

Even now, Chinese companies such as Lerri and SOEs are entering the solar industry by building up gigawatt scale factories. The huge Chinese credit expansion over the last few years has been funneled towards the Chinese state owned companies, who have put money into industries without worrying about the return of capital.

Good time for solar developers and investors who are developing solar projects, as they get equipment as cheaper than expected prices, while bad times for large solar manufacturers who will see lower margins and higher costs.