1. We forecast that global solar system installations will increase at least 20% in 2011, well below our 2010 projected growth rate for a two-fold increase. We see demand slowing in the first half of 2011, as customers refrain from purchases following modest government subsidy reductions within important solar markets, such as Germany. However, we expect solar manufacturers to respond by lowering selling prices to enhance project returns, which should stimulate further demand for solar products.
2. We project global solar cell capacity to increase 39% to 23.8 gigawatts (GW) in 2011 from our 17.1 GW forecast for 2010. We think the industry will continue to add manufacturing plants and production lines at a brisk pace, as existing panel makers look to take advantage of scale benefits. We also expect large companies, which compete in non-panel producing segments of the solar supply chain, to expand vertically, and we think they will enter the panel manufacturing business.
3. We believe that solar panel prices will continue to fall in 2011. We estimate that average selling prices for solar panels will drop about 15% in 2011 versus 2010, with the substantial portion of the decline occurring in the first half of the year. We think competitors will continue to leverage cost structures through increasing scale and improving operating efficiencies. However, we note that our anticipated pricing drop is not as steep as that witnessed in late 2008.
4. Although polysilicon prices have risen through most of this year (the primary raw material used to make a solar module), we expect prices to be on a downward trend in 2011. We estimate the average price of polysilicon will end 2011 at around $60 per kilogram, down about 21% from $76 per kilogram, the current price on the spot market, according to PV Insights. Despite our projection for increasing demand of solar and semiconductor wafers, we expect a notable amount of supply to enter the market, putting downward pressure on prices.
5. We believe that China-based solar companies will continue to take market share from most U.S. and European competitors. Backed by local bank debt, Chinese manufacturers expanded production and cut unit costs in 2010, allowing them to offer panels at lower costs and gain market share. We expect this trend to continue, and see China-based solar companies having more than 50% of the world’s total cell capacity by the end of 2011. We believe that non-Asia based companies will start focusing more on non-production segments of the supply chain, such as project development and installations, in order to preserve profitability.
6. We believe the companies that can best diversify away from Germany, the largest solar market, will experience the most success. We project that Germany will represent nearly 50% of total solar unit installations in 2010, with growth of about 150% from 2009 levels. However, we forecast a 15% decline for this region next year, and, as a result, we expect Germany to comprise only about 35% of total unit installations. We think expansion into the following future solar growth regions will be key: Italy, Asia, the Middle East, Africa, and, of course, the United States. We believe that China-based solar makers, as well as industry leader First Solar (FSLR 133 ***), will be able to do a better job diversifying away from Germany versus European-based counterparts.
7. We think the industry’s solar panel costs will fall approximately 13% in 2011. China-based panel makers have benefitted from lower polysilicon prices and were able to substantially reduce their costs on a per megawatt basis to about $1.28 in 2010, based on our estimates. Although we do not see polysilicon prices decreasing ahead, we believe that benefits from vertical integration and operating leverage will lead to lower average panel costs of about $1.12 by the end of 2011.
8. We believe the industry’s profitability will decline in 2011. We expect panel selling prices to fall faster than costs, and we see gross margins decreasing on average, from the mid-20% range in 2010 to the low-20% area in 2011, for many China-based solar makers. R&D and SG&A expenses should rise as competitors look to improve conversion efficiency rates and expand global sales forces. Overall, we think operating margins will contract from the mid-teens range to the low-teens range over the same period. However, we believe some companies, like LDK Solar Co., Ltd. (LDK 10), will improve their margin profile through vertical integration.
9. We anticipate that the industry’s high financial risk will persist in 2011. We expect debt levels to continue to rise, as China-based solar makers expand production capacity and extend global sales exposure. Assuming higher sales and a modest decrease in margins, we think the industry’s debt to equity ratio will remain at about 80%.
10. We expect solar manufacturers, which have a greater proportion of sales devoted to the United States, to outperform peers in 2011. We estimate that the United States will experience at least a 60% rise in unit installations, far greater than our 20% forecast for the industry overall. We attribute this mostly to robust utility and commercially driven projects, as companies transition to renewable sources of electricity, given favorable incentives and more attractive prices. We expect Advanced Energy Industries (AEIS), a semiconductor equipment maker that is also aggressively expanding in the solar inverter market, to be a major beneficiary of this trend. We believe AEIS will generate nearly 80% of its solar-related inverter sales from the North America market.
