By Gerard Wynn
LONDON May 10 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
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
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
Polysilicon spot prices have roughly halved in the past
eight months, trading at around $25 per kilogramme, according to
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
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
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
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.