Solar in for healthy Q2 but fears about 2011 remain

FRANKFURT/NEW YORK Mon Jul 19, 2010 5:22am EDT

FRANKFURT/NEW YORK (Reuters) - Strong sales of modules in Germany, the world's No.1 solar market, are set to boost revenues for the sector elite's in the second quarter but won't allay fears about weaker 2011 demand as incentives wane.

After a horrific 2009, top makers of the clean energy systems such as First Solar, Renewable Energy Corp (REC), Q-Cells and Suntech Power Holdings have seen robust sales so far this year.

That has been driven largely by strong demand in Germany, where developers rushed to build projects ahead of subsidy cuts that began to take affect this month and will reduce financial incentives for the industry.

Norway's REC, which will start off the solar earnings season on July 20, will likely highlight its efforts to grow outside Germany in new markets such as Italy, the Czech Republic and the United States.

But Italy's new plan to slash production incentives for Europe's third-biggest solar power market in 2011-2013 has raised worries that that market may not offset expected declines in German demand.

"Demand outlook for 2011 remains sketchy with further regulatory uncertainties looming in Italy and the Czech Republic, the second- and third-most important PV (photovoltaic) end markets in 2010," BHF-Bank analyst Goetz Fischbeck wrote.

According to EPIA, the world's biggest solar industry association, newly added capacity in Germany could drop to 4 gigawatts in 2011 from an expected 7 gigawatts this year.

Much of that decline should be offset by growth in non-European markets such as China and the United States, while overall EU markets are likely to shrink by 27 percent in 2011 versus 2010.

That cloudy outlook has punished shares in the sector, knocking REC 48 percent lower so far this year, Germany's Q-Cells 49 percent and the U.S.-listed shares of Chinese companies Suntech and Trina each 35 percent.

SOLD OUT, FOR NOW

First Solar, the leading manufacturer of modules and the industry's lowest-cost producer, has been the among the top performers, recording a drop of just 4.4 percent this year.

Companies based in the United States and China are expected to begin reporting quarterly earnings late this month and in August, while their German peers are scheduled to release results in the second week of August.

According to data compiled by StarMine, Q-Cells and U.S.-listed SunPower Corp are the mostly likely among the sector leaders to miss Wall Street's profit forecasts for the quarter, while China's Yingli and JA Solar Holdings the most likely to top forecasts.

Several companies including First Solar have said they had sold out all their production for 2010, a positive development that has helped support solar cell and module prices which had shrunk by as much as half in 2009.

European solar companies also got a reprieve from ever-increasing price competition from low-cost Chinese producers in the first half of 2010 as the euro fell by 15 percent against the dollar.

That hurt pricing power for both Chinese and U.S. manufacturers, although the recent rebound in the European currency could turn up the pressure again for Q-Cells and other European companies in the coming months.

"I don't think a weak euro/strong yuan is a key focus in the short- to mid-term. (The) Chinese cost advantage (is) still too huge, and unlike the euro, the yuan isn't going to jump around. Wage inflation in China is unchanged," said CLSA analyst Charles Yonts.

Coupled with austerity-driven cuts in European subsidies, that does not bode well for European-based producers.

"As you see another round of (subsidy cuts) coming in 2011 I think you'll see even more uneconomic solar manufacturing come off in Europe," said analyst John Hardy of Gleacher & Co.

(Additional reporting by Leonora Walet in Hong Kong; Editing by Michael Shields)

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