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Solar’s Positive News: Capacity Plans Are Finally Adjusting

This year’s period of intense over-supply in the solar sector has continued to pressure solar players, leading to a recent batch of announcements of cut-backs and cost reductions. All of this may simply seem to be a continuation of the recent slew of bad news that has plagued the industry in the past few months. However, in the end, it is likely to be seen as at least one of the antidotes to the sector’s troubles.

Source: SolarBuzz, by permission. 
The chart above from SolarBuzz illustrates the point succinctly. The initial problem for the solar industry was of course the collapse in demand out of Europe related to cutbacks in the Feed In Tariifs (FITs) in a number of countries such as Italy and Germany. However, we have seen an increase in forecast demand in other countries. The red columns in the chart above in fact point towards a decent increase in demand globally across 2012. So far, so good.
The real problem, however, has been that even with a rebound in demand, the production plans of the main solar players have been far too aggressive - pointing to a rapid continued build out in capacity despite the lack of supportive demand. The yellow line in the chart is the result – a continued and rapid increase in inventories – no doubt to be followed by further price declines across the supply chain. Moreover, even on a reasonable assumption of a cut-back in the intended capacity build (blue line) the calculations from SolarBuzz only managed to show a stabilization of the high levels of inventories across the year. Obviously, without dramatic a adjustment in supply, that points to another difficult year ahead.
The problem is more than clear. However, solar manufacturers have finally begun to adjust their plans for capacity expansion. The most recent example was the announcement by Suntech Power (STP) of cuts likely to be of some 20% of 2012 expenses, including job losses. The press notice, which you can read here, makes the retrenchment clear:

‘While continuing to focus on production efficiency, the initiatives target to reduce operating expenses by at least 20% in 2012; hold capacity expansion in 2012; and improve working capital by $200 million by the end of 2011′.

From the point of view of the industry as a whole, the most important issue is of course the decision to hold off from any further expansion of capacity until the end of 2012. This type of action is exactly what the industry needs in order to have any chance of stabilizing and getting the inventory overhang down.
According to further press reports, a range of other leading solar companies have made similar announcements:
  • Suntech Power, as mentioned above, has halted new capacity increases until the end of 2012
  • JA Solar (JASO): halt to capacity increases
  • Trina Solar (TSL): halt to capacity increases
  • First Solar (FSLR) has delayed the construction of its new plant in Vietnam
  • SunPower (SPWRA): 10% cost reductions.
This is all good news. With the major players now beginning to bring a halt to capacity increases, the increase in demand over 2012 will have the opportunity to eat into the inventory overhang and produce a much more stable position in the balance between supply and demand.
There are other headwinds facing the industry. However, as we move forward the industry islikely to be in much better shape than would have been the case if the major Chinese players had continued to push ahead with capacity build-outs in the face of a burgeoning inventory position in the industry as a whole.
Disclosure: I have no positions in the stocks discussed.