by Stephen Lacey
February 02, 2017

Stephen Lacey: Today we're looking upstream. A combination of manufacturing expansion and lower than expected demand in top seller markets, caused a very steep decline in PV module pricing last year. Will it ease up at all in 2017? We are talking with Jade Jones, a senior analyst at GTM Research, who tracks PV production trends. She's on the line from San Francisco. Hey Jade, welcome.

Jade Jones: Hey Stephen.

Stephen Lacey: Shayle, I have described, and I've heard many others describe, 2016 as a bloodbath. Would you like to fill in and provide some context to that word? Would you actually use that word to describe 2016? Then, I want to hand it over to Jade, to set the scene for what exactly happened last year, and carrying into this year.

Shayle Kann: First, I think if you're talking about 2016 as a bloodbath, being more specific, that term is being used to talk about how 2016 was for solar panel manufacturers.

Stephen Lacey: Yes, well we're talking about manufacturers. I've used that term for the solar industry across the board, for basically any publicly-traded company.

Shayle Kann: Right, so there's separate reasons why one could say that it was a bloodbath for the downstream companies, like SunEdison, but for the purposes of this conversation we're talking about the panel suppliers. I personally think it's a bit of an overstatement, if you're thinking about 2016. Largely because, this is the latest oversupply cycle, but the previous oversupply cycle, which was roughly 2010-2012 was worse. That was the last time around when we had a ton of manufacturers that went bankrupt.

We didn't have so much of that in 2016, but what did happen during that last go around, was that the oversupply hung on a lot longer than most people expected. You expect to go through some degree of oversupply and under-supply. It's a cyclical market, so everyone expected panel prices to fall, but then they just kept falling, and kept falling, and kept falling, way below what a lot of manufacturers could stomach. Especially the newer technology manufacturers, which is how we ended up losing all these new thin film companies, like Solyndra and many others.

We've now had, basically, six months of pretty rapidly falling panel prices, globally, today. The panel prices were basically flat from 2014 through the first half of last year. Then, they started to crash. They've fallen, depending on which pricing you're looking at, somewhere between 20-30 percent, just over the past six months. The question is, as we enter 2017, is this going to be another massive oversupply cycle where prices continue to fall, and we see all these bankruptcies? Or, will things start to stabilize a little bit more this year?

Jade, before we get into that, can you walk us through the state of pricing today?

Jade Jones: I would say, the state of pricing today is really driven by the current market dynamics in the downstream realm. What we saw in 2016 was largely a response to demand seasonality in major markets. Demand seasonality in major markets and supplier reactions via the capacity additions, et cetera, are really what's going to drive what the 2017 landscape looks like.

Stephen Lacey: Jade, what are you talking about exactly when you say demand seasonality?

Jade Jones: Demand seasonality is demand in major markets and how it changes quarter over quarter, and half over half. What we saw in 2016 was the largest market in the world, China, had a really strong first half of the year, which improved some steadiness of global prices. It was also followed by a really weak second half of the year, which had an impact on its local, domestic Chinese prices. Then also, regional prices in other major markets such as Japan and the US.

Shayle Kann: You've got two sides of the equation that can cause oversupply, and both of them happened in the second half of last year. One is what Jade just mentioned, which is that demand for solar panels, globally, fell in the second half versus the first half of the year, thanks in large part to China. The other side is supply, which meanwhile was increasing, in part because you had a lot of these Chinese manufacturers who, in order to get around import tariffs in the US and in Europe, were setting up manufacturing facilities outside China, so places like Southeast Asia. You have increasing manufacturer capacity, coincident with decreasing demand, which kind of all hit at once in the second half of last year. Thus, prices crashed.

Stephen Lacey: More specifically, a lot of these manufacturers that were scaling up expansion were expecting very high demand in China. This seems very specific to China's lack of demand, yes?

Jade Jones: Just a little bit of background: When China had released its 2016 production for the end of the first half of the year, it was released around December. There were a couple people who made the call that there may be a dramatic shift in demand in the first half of the year versus the second half of the year. A lot of the commentary, when the market started to realize that prices may fall in the second half of the year pretty dramatically, many people were forecasting prices to fall at a more dramatic rate year over year. Typically, you can figure out how much prices will fall year over year, by understanding how much cost will fall over year over year. The difference this year was they kept falling week over week, pretty dramatically, to the point where prices in some regions, were at internal production costs for some suppliers.

Shayle Kann: That's a key point right there. By the end of the year, we had prices that were so low, that manufacturers were selling at cost, which basically means that, if prices continue to fall this year, either they have to pretty drastically reduce their cost structure, or they're going to start selling at a loss, which is a recipe for bankruptcy. What is your expectation of what happens with pricing this year?

Jade Jones: For the first half of the year, it's going to be a little bit different. We're expecting really strong demand in China. US demand in the first half of the year is going to be really strong, because there are a couple projects that are spilling over from 2017. Of course in the US, we expect demand pooling in Q4, which will be pretty healthy.

The big question here is, what is going to happen in China? I ask how low will producers go? Of course, producers have been pretty insistent that they won't go below their costs. Just to give some context to that, at the end of last year their internal production costs, not including any procurement of OEM, et cetera, their internal production costs were around $0.35 per watt, and probably below $0.30 per watt, at the lowest at the end 2016.

By the end of 2017, production costs will probably decline. Maybe in the low teen percentage, so maybe 10-12 percent. We may see production costs in the high $0.20 per watt region, which would mean that if suppliers continue to price at cost, than we may see prices in that region, assuming some margin, likely prices will steady off in the low 30s.

Shayle Kann: There was a bunch of capacity expansion the past couple of years, which is part of what caused this problem. Have we seen a lot of suppliers pulling back on capacity expansion plans, or even shuttering existing facilities yet? That was one thing that ended up happening in the last cycle, that finally broke the oversupply.

Jade Jones: Yes. If you were going to look at net capacity additions versus net capacity losses, via bankruptcies, et cetera, and closures, year-over-year we still saw growth, or at least the capacity, incrementally growing. I think that if we're going to compare what happened in 2011 and 2012, in terms of capacity additions, we're probably going to see a little bit more aggressive capacity growth.

To note, we've already seen some suppliers react to the market. We've seen big restructuring, such as Mission Solar, who shed it's cell business for solar and SunPower, in reacting to the current environment by restructuring their businesses in their own unique ways. I've had some conversations with suppliers who definitely have said that they have absorbed what's happening in the market, and they're going to keep their capacity steady.

There are some suppliers who, it's in their DNA, that every year is an opportunity to grow market share and grow capacity. They have their own reasons. They're going after aggressively growing market share and valuing shipment growth over the margin for a particular project. I would say, yes, in net we're going to see more growth than decline, in capacity, in 2017.

Stephen Lacey: If we're going to see people expand capacity, the market is still pretty sensitive to that added capacity, which means that it's probably not going to improve significantly. The pricing environment won't improve significantly over the next year. Is that safe to say?

Jade Jones: Yes, capacity additions right now will have a negative effect on the market, in general. If you look at GTM's global forecast, on the upside, we expect kind of a flash year. In our base case we expect a decline year over year. If we had an oversupply in 2016 of modules, and we're increasing in 2017, of course it's not going to look good for prices.

The one thing to note here is, there really is a limit to how low prices can fall in 2017, because we're not expecting production costs to fall as low as they did in 2011 and 2012. There's no secret that polysilicon prices have reached their lows in 2016, and have had some steadiness in 2017. There's only so low that polysilicon providers can go because they need some margin to expand in the future. They need it now, because it takes a couple of years to add capacity for them.

Shayle Kann: What about the financial position of these manufacturers. The other thing that contributed last cycle was that, we kind of came into it with a bunch of the top tier suppliers, particular Suntech and Yingli, having pretty heavy debt load, so when the funding spigot dried up for them, and they were selling below cash costs, there was just no way for them to continue operations. Are the remaining top tier supplies today, the Jinkos, JAs, SunPower and First Solar's of the world, are they in a better financial position than the suppliers were last cycle? Or, is it just as precarious?

Jade Jones: They've definitely had a couple of years of better margins and access to more markets that can help them out, in terms of revenue, and all that. They had a couple of years of some healthiness, which helped them recover from the last cycle, but if you look at the debt and you compare it by where the company is located, it's still not as healthy and has not recovered as much. I would say when you talk to some manufacturers and you're talking about who's number one, in terms of shipments, that is always going to change. That is, as well, going to be a cyclic thing because of manufacturers, liabilities and debt.

Stephen Lacey: Jade, I would like to know a little bit about the vertically integrated strategy and how that has helped or hurt certain manufacturers. The gold standard, is of course, SunPower and First Solar, which have undergone some of their own restructuring over the last year. I think, Tom Werner for example at SunPower, has talked about irrational PPA pricing, which has kind of hurt the power plant development business there. Most people believe that when they come out of their restructuring plans, they'll be on solid footing. They've gone through this before.

Chinese manufacturers, after sort of the last downturn, started developing their own development arms. More specifically targeting the Chinese market, which was growing very quickly. I think, particularly Yingli Solar, which put a lot of stock in its solar development business, had some serious troubles and issued a bunch of warnings about being a growing concern last year, because the project development business really wasn't taking off they way it thought it would.

Can you just speak to the general experience of some of these manufacturers that have vertically integrated arms, that are actually in project development, and what it has done to either help, or hinder, them during this latest pricing downturn?

Jade Jones: Yes. The theory is, with having a downstream arm, was that you have an integrated line where you can directly sell your modules. Another benefit of having this downstream arm is that you can capitalize it in different ways. You can sell projects. You can keep them on and benefit from revenues from electricity, but what we saw over the past couple years is, while a lot of manufacturers added these downstream arms focusing on China, it doesn't seem like it's been the golden ticket for stabilizing supplier margins and stabilizing their business. In fact, we've seen a couple of manufacturers in the last round of earnings calls that have refocused on their core manufacturing business. Some suppliers have even spun off their downstream arm, to refocus on manufacturing, because they were so capital and asset heavy.

Stephen Lacey: What can we say about how this has impacted American producers? We both mentioned Mission Solar, based in San Antonio, which had been serving the utility-scale market, and has shifted it's focus on the commercial-scale market. It has had to lay off a couple hundred people recently. I know they laid off a bunch of people last fall, as well. I'm also hearing that SolarWorld is doing quite well. There's this push for ownership in the residential market. Higher quality brands are getting more attention, so there's kind of this interesting dichotomy between pricing pressure and renewed demand for American-made, perceived higher quality products. What can you say about what's going on with American manufacturers?

Jade Jones: First, I would note that U.S. manufacturers are not immune to price decline, seen in 2016. They're definitely not going to be immune to price decline seen in 2017. A question for them, how low can we go? How can we reduce internal production costs? How can we diversify shipments, so we have some stability and are able to capture markets, where prices are at levels that they can accept? We did see a resurgence in U.S. manufacturing and the health of U.S. manufacturing in 2014 and 2015, but that was largely due to general health in the market, health in prices, health in global demand, and U.S. demand where we saw a year-over-year growth in all those market. 2017 is definitely going to be a tough year for those manufacturers. You're right, we have seen it in the case of Mission Solar Energy, where they've rethought how they're going to do production, how they're going to work with OEM partners, and what products they actually put out into the market.

Shayle Kann: How are module supply and demand dynamics, how are they going to impact the future solar globally? One of the questions that I grapple with is, are we doomed, as an industry to constantly be going through these kinds of cycles, where prices crash and then flat line? Then, they crash and then they flat line. Or, maybe at some point we'll see a rapid price increase, at some point, because there'll be an under-supply, which is something we haven't really seen a whole lot of. Are we doomed to be in this sort of cycle of constant turmoil within manufacturing? Or, is there any way you could imagine the industry starts to settle, everything becomes a little bit more incremental, and we don't end up with these overhangs?

Jade Jones: Yes. First I would note, supply and demand fluctuations are a regular part of any market. What would cause more stability, in terms of supply-demand, between manufacturers and the downstream market? That's honestly a question for our global team. It's a question of when we have policies, or incentives, or just regular market drivers, that make markets more predictable for manufacturers to adjust to. That's really the big question here. I would say that, in 2016, no manufacturers were responding for demand to grow really strongly, but seasonality kind of screwed them up a bit and caused those prices to fall.

Yes, I would say that it's mostly a global demand question. When can markets be more predictable? When can we trust that FIT adjustments won't have such a dramatic effect on demand in a market? When do we have the tools in place to make demand consistent and predictable?

Shayle Kann: Just to counter my own question, it's not like more mature commodity markets don't have volatility. You look at oil prices, and obviously they swing up and down rapidly, drastically, and unpredictably, so maybe solar modules, which are, to some degree commoditized, are going to end up in a similar cycle.

Stephen Lacey: To reiterate, to wrap this up, you expect some new capacity build out. It's kind of unclear about what demand will look like, particularly in China, but we may see some increasing demand in China, India and in the US, the top three markets. With that said, it just sounds like we're going to see a rebound of prices until 2018, so 2017 as stated by some leading CEOs at manufacturers, seems like it still could be still aa pretty rough year for these companies. Is that a fair way to summarize?

Jade Jones: Yes, I would say 2017 is definitely going to be a rough year, and 2018 is actually kind of questionable about how much demand can manufacturers take advantage of in 2018. We do expect them to grow capacity in 2018, so how will that balance out in the end? I think that there's more opportunity for the supply-demand market to balance out in 2018, than 2017, but it's still a big question.

Stephen Lacey: You eluded to this earlier in the show, but satisfy my lurid curiosity, does this mean we're going to see a bunch of new bankruptcies, or a bunch of new consolidation, or just really messy market, or a lot of the major manufacturers on stable enough footing that the lay offs and the reduction in capacity will be enough to keep them going through the next 12-18 months?

Jade Jones: I would say the end of 2016 was pretty messy. SunPower's announcement caught a lot of investors off guard, but I do think that there are some manufacturers out there who's balance sheet may get the best of them. Another key thing to note, a lot of this capacity lies in China. Whether we'll see a really dramatic change in how much capacity is really out there, really depends on what happens in China. Will the Chinese government allow manufacturers to file for bankruptcy? What is that going to look like there? We've heard promises in the past from the Chinese government saying, "We're only investing in manufacturers who continuously focus on increasing their technology, etc." We haven't seen any effect of such claims in policies.

Stephen Lacey: Jade Jones is a senior analyst at GTM Research. She joined us by phone in San Francisco. Shayle Kann is our Senior VP of Research. He is my regular co-host, and he joined me by phone this week as well. Check out Jade's reporting on this. The latest is the solar executive briefing that they put out every quarter. The team walks through pretty much every sector that we're tracking. You can check out PV Pulse, and all the other research that Jade is working on to help people understand this funky pricing environment. Thanks to both of you and we will catch you next week on The Interchange. I'm Stephen Lacey.

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