Solar Modules
Incredibly, the second month of the fourth quarter saw more volume delivered than October. In November, 1.702GW were delivered; this is about 1.2% more than the prior month, but is around 39% more than November 2013. Thus far, the quarter has 36.6% more volume than the corresponding period of last year.
The condition suggests that the fourth quarter, which is traditionally dedicated to demand in the domestic market, having to continue the strong export trend, will have greater exports than the third quarter.
Concluding that Q4 will have record shipments, should we consider potentially better performance of the companies because of the larger-than-anticipated export contribution? Moreover, where Q1 is concerned, what is traditionally the strongest export quarter of the year will now receive domestic demand possibly three or four times that of Q1 2013 – the volume, which is a result of the FiT program, now expanded to the first quarter of 2015. How is the domestic demand going to play out with the yearly slowdown on production due to the Chinese New Year? Is the export in Q1 going to be reduced to accommodate China?
Currently, forecasts for 2015 have a tendency to see as much as 20% growth in solar demand. This forecast requires Q1 to see the heavy engagement in Chinese deliveries and no reduction of export volumes for the first quarter of the year. Having a look at the solar companies’ current market capitalization, it is difficult to understand what conditions are imposing this valuation. Everything from a perspective of volume indicates strong execution to continue. If the fourth quarter composition has so much export, this could be a surprise to the markets. Even with currency issues, ASP should be able to sustain gross margins; the problem is that external factors are managing the sector. The operational dynamic is in a state of suspension, and so are the fundamentals.
Similarly, insight into the market conditions at the microeconomics level seems to escape the equity markets. Deliveries to Japan hit another high note in November, now bringing the volume for the quarter to 1.3GW. This volume, if kept at the same pace in December, will challenge the record 1.9GW achieved in Q1 2014. It is difficult to accept some theories that Japan is slowing down due to recent suspensions, with the past two months having such a high volume. The recent understanding of METI rules to apply in January 2015 not only clarifies demand in the country for the next couple of years to stay at the 7.2-7.3GW pace of 2014, but also identifies no connection of suspended volumes as being part of this demand. If suspended volume can be transitioned effectively, it can offer an additional boost to already robust figures.
Thus far, Japan has 45% of the market in Q4. Second place is held by the US, with what appears to be a 4% reduction in volume versus the third quarter. Interestingly, Japan’s role in the third quarter was slightly more than 46%, which indicates that volume for the quarter has been increasing in all parts of the world. We expect US-destined volume to continue at the same levels, or perhaps drop off a bit, only to increase again in mid-2015 based on a favorable outcome of the recent review of 2012 tariffs, lowering overall quota to 17.5% from the average of 31%. All heavily engaged players are on the list for reductions, so the logical conclusion would be to see the volume increase. We do not have great visibility of Canadian Solar’s movement of modules from Ontario, which could have an additional 30MW of modules produced monthly for the US, but this quarter Trina Solar is a dominant force in the market, as it should be, based on its favorable 2012 tariff levels.
Elsewhere, the UK has already received 20% more volume than the entire third quarter, what now stands at 260MW. Volume to Belgium has been relatively low in November, but we see a strong level of deliveries to Holland, another potential stop in the journey to the UK.
Another location that is beating its result from the third quarter is India. There is a lot of excitement around India’s plans for solar energy, and that excitement has been passed on to expectations on the Chinese exports. Most of the volume discussed in India today requires Domestic Content and has been covered by DCR requirements in most of the drafts we’ve seen. Our understanding of the local capacity today shows it to be limited in volume, as well as in quality, to cater to those targets. Looking at the past execution and sluggish addition of solar energy capacity, we see a similar environment ahead, unless business relationships are formed between Indian and foreign companies. Most, if not all projects, are government owned at least from the pool of the recently announced plans, offering business opportunity only in the form of EPC services. Since none of the exporters sell EPC apart from their own inventory, in our view, the Indian market will not provide a large outlet for Chinese modules, and possibly nothing for Chinese-owned project opportunities. This can only change if substantial financial engagement would take place from Chinese companies. Unfortunately, this seems unlikely as the complexity of land and ownership laws and even the uncertainty of revenue collection from solar plants indicate obstacles for such an action. While there is a demand outside of the government’s mission on solar, the desire of having DCR in place conflicts with achievement of government targets. None of the companies that lead in the global solar market can financially afford to enter the region at the risk of a loss, given no assurances from the government. We see a potential for the joint venture development as the most potent outcome and possibly more clarity on commitment to Chinese-based companies. Most forecasts do not put a lot emphasis on India, yet seeing Japan, USA and China as three dominant destinations, any joint venture activities in our view would not impact this market until 2016 and beyond.
Emerging markets continue to add volume overall, with Honduras making the top-10 destinations this quarter. Thailand once again is appearing on the list, while 99 countries have been on the delivery list for US-listed and Mainland companies. The list could be greater if we tracked that detail for no-name organizations. Essentially, more than half of the sovereign states on the planet have received solar modules from China, and there is nothing in our view that can interfere with growth of volumes to those countries or expanding reach to other countries.
Quarterly volume to date shows 64% of market share for US-listed, with 41% belonging to CN4.
Solar Wafer
This month we see an increase of wafer deliveries to Taiwan from 471MW in October to 520MW in November. This figure indicates that demand for Taiwanese cells is coming around and therefore improving demand for Chinese wafers. The list of major destination remains unchanged and we do not expect any changes in the top 10 players for this product.
Solar Cell
Cell exports seem to remain at the same level for a number of months now, staying around 160MW, but in November ending at 168MW. Top 10 exporters have 124MW of this volume.
Taiwanese cells exports to China remain at a low average in October, but overall volume has increased slightly. Until December, the US tariffs on Taiwanese cells in general terms had made their usage preferable over Chinese cells, but lock this supply out from manufacturers in China, since their use would trigger new tariffs on modules assembled there if sold to the US. As a result, most Chinese corporations stopped delivering to the US, leaving 96% volume to 10 entities, with most of those delivering to the US using Chinese cells and the 2012 tariff outcome of 31%. It appears that only CSIQ-GCL seems to be sending wafers to Taiwan for tolling with a potential of having them go to Canada, outside of companies like LDK or SOL, which seem to be selling wafers to Taiwan. CSIQ could benefit from the 19% tariff on Taiwanese cell versus 31% on its own cells. However, the preliminary review in December made Chinese cells not only cheaper to use in China at 17.5%, but also globally, with the exception of Motech cells having an 11% tariff. Since the prices for Taiwanese cells are at the same level as the Chinese cells, Taiwanese cells should find more demand for use on the Mainland. The low tariff outcome for May 2015 is giving additional confidence to develop cell capacity in China for a few selected companies in mind of the US market, as that market’s gross margins are improving by some 50%.
The above situation creates a number of issues for some. First is for Taiwanese companies, as they cannot achieve viable gross margins at the current cell prices. They will be looking to increase in price or another outlet to ship their goods. Moreover, it forces them to keep their expansion at bay and ride the 2015 demand without benefit. Secondly, the capacity expansion in China is a matter of the state and impossible to access by undesired companies financing. That low cost supply from Taiwan cannot be sustained by the Taiwanese; therefore, some Chinese companies will have to pay more for cells and hope to transition this cost to module ASP. The handful of companies able to expand cell capacity in China can, and certainly will, keep module ASP at the current price. They will not suffer cell shortages, as they can expand the capacity at will. It is difficult not to conclude that December preliminary findings have global impacts on supply demand for 2015 and add huge benefit to CN4 companies. Further, the same preliminary finding removes the need to expand overseas for the reason that a viable gross margin can be produced with 17.5% tariff, with the second reason being the unknown outcome of a similar review at the end of 2015. The only potential for overseas expansion could be left for India, with its own set of problems and done with participation of Indian companies.
Polysilicon Imports
There is no change in poly pricing, as well as particular impacts of this pricing on gross margins. The volume in November has seen a spike to 11KMT versus 8KMT in October. US-listed imported around 20% more poly than in October. The ASP increased to $21.59 per kg from $21.52 in October for those purchases.
CN7 GADP (Global Average Declaration Price)
GADP for the quarter to date remains lower than Q3 for all companies, with the exception of CSIQ. The UK quotes for the company are behind this figure; this time 3MW sent to the UK has been priced at $0.88 per watt. Overall tally of those high-priced shipments to the UK is 35MW for the last three months, a number reassembling 40MW of plants allegedly being built by the company in the UK.
The changing GADP pricing seems to be associated with currency fluctuation at this point. We have a certain level of confidence that Canadian Solar has acknowledged those in their margin changes, and for most companies they discussed currency fluctuation during their conference calls. The ratio of exports to expected domestic contribution is now visibly shifting to dominant global shipments, and offers a small possibly of better gross margins despite the currency depreciation, since prices in China remain lower than global prices. We assume that when guidance was made by each company in November, both figures of export and domestic were well known to companies, but still markets should be surprised, as we are, at the composition of the fourth quarter. Further, if that awareness toward currency depreciation resulted in derivative contracts offsetting it, we should see improvement in the net income from the third quarter. We believe that in the third quarter, companies were caught by currency fluctuations and are prepared for them in the fourth quarter.
Thank you
SPVInvestor Research - Robert Dydo, Jason Tsai
