COLUMN-More fat to trim on upstream solar: Gerard Wynn
By Gerard Wynn
LONDON May 10 (Reuters) - Upstream solar companies are finally cutting prices under pressure from their customers' fight for survival, with profit margins showing more fat to trim and potential relief to the struggling sector.
Margins are falling at top producers, but still have a long way to go when compared with the downstream end, in a gradual re-balancing across the value chain.
When potential efficiencies are added from excessive profits made by installers, the prospect is of continued price falls and a sharpening competitiveness for solar power.
Downstream manufacturers have featured a growing list of bankruptcies, debt restructurings and takeovers under pressure from global over-capacity and plunging prices and margins.
The rout is a result of cheap Chinese competition which has driven western governments to pare subsidies, spurring a vicious cycle of over-capacity and pricing pressure.
The sector faces serious, continuing headwinds: the world's leading market last year, Italy, is expected to contract sharply to as little as 2 gigawatts of newly installed capacity in 2012, from 9.3 GW in 2011.
Until recently, the upstream end had survived the cull partly as a result of higher barriers to entry plus the benefit of long-term contracts negotiated when polysilicon was in short supply.
But faced with the prospect of customers going under and a glut of lower grade product, such contracts are now being re-negotiated to follow spot prices which are at breakeven prices.
For example, U.S.-based Hoku Corp in March amended a fixed price contract with leading module maker Suntech , to quarterly pricing at falling, spot market rates.
Such amended terms can only become more pervasive and relieve pressure on manufacturers even as module prices continue to fall, down around 10 percent this year following a halving last year.
Polysilicon spot prices have roughly halved in the past eight months, trading at around $25 per kilogramme, according to HSBC analysis.
That's from highs of around $250 in long-term contracts signed in 2008, at a time of a global shortage which has now turned to glut.
Spot polysilicon prices are now close to cost price even for leading producers, according to Bloomberg New Energy Finance.
That's putting pressure on so-called tier 1 producers, which market the vast majority of their higher quality output through long-term contracts.
A growing trend is to re-negotiate old contracts and sign new ones more competitively (at around $25-30) and on more flexible terms, including quarterly or monthly pricing rather than fixed years into the future.
The world's number two producer, Germany's Wacker Chemie , last week reported a "substantial reduction in polysilicon prices from a year ago", in its interim report.
Profit margins have declined across various metrics and time periods at top makers such as Renewable Energy Corporation , Wacker Chemie and GCL Poly Energy Holdings.
For the first quarter of this year (compared with the corresponding quarter last year) REC's polysilicon EBITDA margin was 46 percent (down from 59 percent) and Wacker Chemie at 17.7 percent (down from 27.2 percent), the companies report.
Viewing full-year 2011 results, GCL Poly's solar gross margin was down to 38.6 percent from 44.4 percent compared with 2010, the company said.
It is sometimes difficult to parse precise solar margins because of the way some businesses are structured: for example REC's polysilicon business also sells into the electronics industry.
Nevertheless, it's striking that margins are fatter than top silicon solar module makers such as Suntech and Yingli.
Suntech saw a gross profit margin of 9.9 percent in the last three months of last year (Yingli 3 percent), and estimated 3-6 percent in the first quarter of 2012. Yingli forecasts a gross margin rebounding to 10 percent in January-March.
The conclusion? Contracted raw material prices have further to fall.
That will allow solar module prices to continue to fall - though far more slowly than last year - and see the technology compete with rival alternatives such as offshore wind, and draw ever closer to parity with fossil fuels.
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