| LOS ANGELES
LOS ANGELES A steep fall in the price of solar panels has chipped away at manufacturers' profits this year, and relief is unlikely to come soon, as many in the industry believe pressure will intensify and push prices even lower into 2010 and perhaps even 2011.
Global demand for solar power soared last year until a pullback in solar incentives in Spain and a credit crisis that stifled financing for new projects led to a falloff in demand for solar panels and a global supply glut.
In turn, solar companies worldwide -- including heavyweights like China's Suntech Power Holdings Co Ltd, U.S.-based First Solar Inc and Germany's Q-Cells AG -- have been forced to cut the price of their panels, hampering and in some cases erasing profits.
"I suspect it's not the bottom," said Jenny Chase of London-based industry research firm New Energy Finance. Chase said panel prices are still falling because it takes time for the decline to work its way through the supply chain, and costs of the industry's primary raw material, silicon, are still high despite having dropped sharply since last year.
Fears of a prolonged decline in panel prices have weighed heavily on solar stocks this month, and Jefferies & Co cited the continued slide on Friday when it cut its ratings on First Solar, SunPower Corp Suntech Power Holdings Co Ltd and Energy Conversion Devices Inc. [nBNG540560]
After peaking at $4.20 a watt in 2008, prices for solar panels have dived as much as 50 percent to about $2.40 a watt for European and U.S. companies that make silicon-based panels and $2.00 a watt for Chinese suppliers, Chase said. Prices on lower-cost thin film panels are between $1.00 and $2.00 a watt.
The bottom-out price "could be as low as $1.50 for crystalline silicon, which would be a shockingly low price," Chase said.
Lower prices are good news for solar customers as the cost of the renewable energy source reaches toward that of power created from dirtier sources such as natural gas and coal. Still, the drastic pace of the tumble has sent many companies scrambling.
"It does you no good to get the prices down there and close to grid parity if you're losing money on every one," said Kevin Landis, chief investment officer of Silicon Valley-based Firsthand Funds and manager of the $5.4 million Firsthand Alternative Energy Fund.
The better reason for a decline in the price of solar power is when companies can cut manufacturing costs, Landis said, adding that as an investor, he favors those with a technological advantage. He pointed specifically to SunPower, whose solar cells are the most efficient in the industry at converting sunlight into electricity.
SHARE VS PROFITS
But with the market for solar panels still in a massive state of oversupply, Barclays Capital analyst Vishal Shah expects prices to fall to $1.40 a watt by the end of 2010 and $1.00 per watt in 2011. That would require companies to drive large volumes to make up for very low margins.
"There will be a trade off between market share and profitability," said Shah, who last week downgraded the sector to "neutral" from "positive."
Driving that move are two companies: U.S.-based First Solar, which makes its panels from cheaper cadmium telluride instead of more costly silicon, and China's Yingli Green Energy Holding Co Ltd, which has cut prices aggressively.
Yingli Chief Executive Miao Liansheng earlier this week credited the company's pricing strategy as a "driving force" behind a rise in shipments and net revenue. At the same time, the company cut its profit margin forecast and predicted panel prices would fall further this year.
In addition, First Solar said last month that it would offer a rebate program in Germany to preserve its position in that market, a move that sent its shares into a tailspin.
That strategy -- expanding market share but weakening profit margins -- forces rivals to accept lower prices as well.
"This is a commodity product and a commodity industry," Shah said, adding: "The third company doesn't have a choice but to fight the market share battle."
Eventually the tumble in prices will moderate, depending on what happens with the industry's supply and demand and how governments' solar subsidy plans shake out, Shah said.
One way to put on the brakes would be for commercial financing to return to normal and reinvigorate demand, said J.P. Morgan analyst Christopher Blansett.
"If we have a painful commercial lending market all through next year, then we're probably going to see some pretty poor pricing trends all through next year," Blansett said.
Bankruptcies, which would take some supply out of the market, would be another way to stop the fall in prices, said New Energy Finance's Chase.
Yet as companies across the industry -- including China's Trina Solar Ltd, Norway's Renewable Energy Corp, U.S.-based SunPower and others -- have raised money through stock offerings to keep their businesses growing, the end of the glut of solar panels and the trough in prices get pushed back, she said.
(Reporting by Laura Isensee, editing by Gerald E. McCormick)