The solar sector enjoyed its day in the sun back in 2007-2008 when there were some spectacular returns to be had from investing in solar stocks. Of course, it all came to a similarly spectacular end when the build-out of polysilicon capacity brought the polysilicon price down from what were clearly unsustainable levels. This coupled with the relentless build out of module capacity by Chinese manufacturers to levels way in excess of demand took pricing into a virtual free-fall. Adding to the woes was the trend to cut subsidies around the world – especially as austerity became the fashion – all of which caused share prices to fall precipitously. Virtually all the leading companies proceeded to fall by over 90% from their peak, many turned loss-making, and some went bust. The nadir was in late 2012 when even the most patient of investors finally quit the sector, some swearing never to return.
By 2013 there were signs that the supply-demand imbalance was starting to rectify itself. Module prices finally stopped falling and polysilicon prices started to edge up. Out of the ashes some sunny optimism is once again emerging in the industry as more and more regions have reached residential grid parity and many others are expected to follow in the coming years. Module prices have fallen by some 75% since 2008, helping to boost demand. Volumes of annual installations have continued to grow throughout the period, and even the financial crisis was not able to cause a decline in 2009, with annual installations routinely exceeding expectations, and compound growth of over 60% pa.The first unsubsidised solar farm was built in Spain last month providing some indication that the solar industry is starting to come of age and wean its way off reliance on subsidies.
It is not all sunshine and smiles though. Several leading manufacturers are still making losses and some are heavily indebted. Minimum prices for Chinese manufactured modules are currently being imposed in Europe, and the US has tried to implement anti-dumping tariffs. There are concerns that these measures may be extended or tightened leading to a full-scale trade war. We believe that the large-scale solar farm market may see a slowing of growth as the lowest hanging fruit has been picked with most of the opportunities in the developed world being built out. Growth in these regions will shift to be dominated by the rooftop market where installation costs are the focus for further cost reductions. In some areas we think valuations are back to frothy levels where heroic assumptions about future project developments are required to justify share prices.
We have taken a cautious approach to this still emerging sector over the last few years. We prefer companies more exposed to the downstream market where solar projects are being built out, and where they are benefitting from the price declines that we have seen in modules and will continue to see in balance of systems. We have an investment in Canadian Solar which was one of the first solar manufacturers to turn profitable this cycle and has expanded its business into the project development area. We are keeping a close watch on developments elsewhere whilst sticking to our valuation and quality disciplines. The sun has started to shine again on the solar sector, but there may yet be some clouds on the horizon.
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