Solar Industry Set for New Overcapacity and Shake-Out Cycle, As Outlook for the Second Half of 2016 Deteriorates

By Ash Sharma, Senior Research Director, and Edurne Zoco, Senior Manager, IHS Technology

Solar PV installations in China in the third quarter of 2016 will fall by 80 percent, triggering a sharp global slowdown in global demand and an oversupply, particularly solar modules. Our latest analysis shows nearly 13 gigawatts (GW) installed in China in the first six months of this year. The rush in installations in the first half of this year, driven by the feed in tariff (FIT) cut on June 30, 2016, will result in a major slump in demand in the third quarter, with installations falling 80 percent. Installations will recover somewhat in the fourth quarter, but they will still be limited by the Chinese governments intent to keep installations beneath the 20 GW threshold for the full year. This pattern in China - which differs significantly from previous years - will drive a global slowdown in installations in the second half of this year and trigger a sharp adjustment in pricing.

Pricing throughout the module value chain has already started to drop sharply, for products that will ship in the second half of 2016. Offered prices for modules are now significantly lower than in the first quarter, as suppliers seek to shift volume ahead of the slump in demand in China. In addition to the slowdown in the domestic market in China, the expansion of production capacity that has been ongoing for some time is also putting pressure on pricing, as suppliers seek to keep utilization levels high, and inventory low. Coupled with price declines is the rise of low-cost end-markets, such as India and Latin America, which are consuming larger volumes at lower prices.
Prices for Chinese tier-1 modules shipped to China will range from $0.44 per watt to $0.46 per watt (excluding value-added taxes) in the second half of 2016. Prices as low as $0.43 per watt for multi-crystalline modules were quoted at the recent SNEC PV Power Expo show in Shanghai.
At this price, photovoltaic (PV) modules suppliers will be selling at a net loss in China. Gross margins of module suppliers will drop from approximately 20 percent in the first half of 2016 to low-to-mid single digits in the second half of this year. Many of these suppliers are under extreme financial pressure with precarious balance sheets. As a result, a further shakeout and consolidation in the industry is likely for suppliers that are unable to operate over the next two to three quarters at such limited margins.
Slowing demand for modules in the United States, the second largest market in 2016, is adding to manufacturers woes. While installation demand continues to be exceptionally strong in the U.S., inventory levels also remain high there, due to the vast quantities of Chinese modules shipped at the end of 2015 and even earlier. This situation is further exacerbated by developers pushing out plans to complete solar projects in 2017, now that the investment tax credit (ITC) has been extended beyond the end of this year. Prices for photovoltaic (PV) modules shipping in the fourth quarter have begun dropping sharply in the U.S., declining as much as 10 percent, since the first half of 2016.

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