SINGAPORE Chinese solar companies plan to run their plants below capacity in order to shed inventory and slow capital spending as the sector battles shrinking profit margins amid tepid demand and depressed panel prices.
Solar makers such as JA Solar and Suntech Power Holdings Co will temporarily idle some equipment at factories to halt a build-up in inventory over the last three quarters, setting aside a long-held view that demand could return in a big way in a seasonally strong fourth quarter.
"We're slowing the pace of expansion because we think there is enough capacity to meet demand," Liu Yong, JA Solar's senior vice-president and chief technology officer, told Reuters on the sidelines of an industry conference.
JA Solar, the world's largest solar cell maker, plans to lower utilization in coming months, said Liu, citing high inventories and seasonality.
Utilization at some solar factories has gone down to 75 percent, but industry experts say mid-sized players in the sector have been running capacity at below half in the last quarter, and many of the much smaller producers have shut down.
"The price has been coming down, we're losing too much. Everyone in the industry is losing," said JianHua Zhao, chief technology officer at China Sunergy (Nanjing) Co, adding that his firm has lowered capacity utilization by about 25 percent.
Analysts say more downsizing measures may ensue on a weaker-than-expected fourth quarter, setting the stage for some companies to lower full-year shipment guidance marked by layoffs and spending cuts.
"Fourth quarter demand could be worse than third quarter. Suppliers will further reduce their utilization to burn inventories," said Jesse Pichel, an analyst at Jefferies Equity Research in a report.
Overproduction and the subsidy cuts in Italy and Germany led to a collapse of more than 40 percent in panel prices this year, squeezing profit margins across the industry and driving at least three U.S. companies, including Fremont, California-based Solyndra, into bankruptcy.
Moves to slow expansion and curb production could be the only way for the industry to stem a slide in prices, said analysts, though the damage caused by overproduction was likely to still be felt in the coming few quarters, with prices likely to slip further into the new year.
"Falling prices into the first half of 2012 across the value chain will likely take their toll on margins, resulting in lower than expected earnings across the board," said Piper Jaffray analyst Ahmar Zaman, citing companies like Suntech Power as likely to be hurt more than most due to its tight margins.
Average selling prices of solar panels, at more than $1.00 per watt may fall to 90 cents in the first quarter next year, said Zaman.
For how long market weakness will persist is much harder to predict amid a worsening economic outlook and the uncertainty of a European bailout. Europe accounts for more than 90 percent of sales of Chinese solar companies.
The future appears bleaker after Britain announced a plan to roll back generous subsidies to the sector.
"If the markets get worse we may need to review our plans," said China Sunergy's Zhao.
(Editing by Clarence Fernandez)