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Ongoing price declines ...is a shift market psychology pushing spot prices lower?

Author: Matthew Plitch and Chris Porter

Area: Pricing

Date published in The Wall: April 28, 2011

What happened?

Results from last week’s PV sector price tracking surveys indicate continuing downward spot price movements in the midstream of the PV value chain. Specifically: 

• Average spot wafer price declined 2% WoW to $3.41/piece, with individual offers observed at prices as low as $3/piece. This marked the lowest weekly average price level for spot wafers since 3Q10 

• Average spot cell price declined 2% WoW to $1.15/W, with individual offers observed as low as $1.07/W. These prices marked new lows in the history of our weekly tracking of spot cell prices. 

• Average c-Si FG module price declined by 1% to $1.69/W, with individual offers observed as low as $1.50/W. The most recent three weeks of data also represent the lowest three weeks of module pricing in our data set since early 2009.

What is the broader context?

Continuing Italian policy limbo has caused substantial module inventory builds across the European downstream. Earlier in the year, hopes that the near-term Italian policy debate would be resolved favorably kept module prices above levels required to drive a significant, inventory-clearing demand response in Germany. At the same time, the reality that this clarity had not yet been achieved also prevented new module orders/installations in Italy. The result was an essentially frozen Italian market, and large and growing inventories both across the European downstream (we estimate current levels at 3GW-4GW) as well as increasingly in the midstream (we estimate current ingot-wafer through module inventories, including WIP and finished goods, in excess of 10GW).

Our outlook for 2011 is based on the expectation that declining module prices in 1Q11 into 2Q11 combined with the prospect of the mid-year FIT degression in Germany will result in a strong 2Q11 demand response in Germany. We expect this demand response to take place once unlevered customer IRRs reach in excess of 8%-9%, consistent with an FG module price of roughly €1.20/W. As reported above, our recent price observations have now fallen below these levels, and declines are showing little sign of abating. While we are observing some acceleration in the pace of German installations since March, these volumes have not yet reached the point that module inventories are starting to clear at appreciable levels.  

If German installation volume does not accelerate rapidly in the coming weeks, we could be witnessing the effects of a shift in market psychology to a state similar to what occurred during much of early 2009, when a combination of multi-GW absolute inventory levels and accelerating price declines engendered a ‘wait and see’ attitude among potential module/system customers.  During this period absolute returns (or even returns relative to alternative assets and/or customer discount rates) became less relevant than customer expectations regarding the future direction of prices and, accordingly, system level returns. A perception of relatively slow installation volume in Germany for the March-May period would support this psychology by reducing customer concerns regarding the impact of the mid-year 2011 FIT degression.

What does it mean?

If our original hypothesis on market development plays out, a rapid acceleration in installation volume in Germany in particular lead to stabilization in module prices in the €1.1-1.2/W range for Chinese Tier 1 modules through June. If, on the other hand, market psychology indeed has shifted to a “wait and see” dynamic, we believe that the current cycle of purchase deferrals and declining prices can only be ‘broken’ by events that lead to a renewed sense of urgency among module buyers. In the near-term, we can foresee two potential drivers of this dynamic:

• A sufficiently positive resolution of the Italian policy debate over the next few days to drive rapid draw-downs of European module inventories and once again lead to customer concerns over access to sufficient module supply through the second quarter. The two primary drivers of this positive outcome in Italy would be sufficiently liberal grandfathering rules that enable pull-through of modules and installations ahead of an extended interconnection deadline and/or a sufficiently large system-size limitation under the new feed-in tariff rules that effectively leaves a large portion of the Italian market in 2H11 uncapped. Press reports today have indicated an increased likelihood of both an extension of current FIT rules through August 31^st as well as an increase in the system size cap exemption to systems as large as 1MW. While we believe that end of August grandfathering terms would likely have only limited impact on incremental demand pull-through in Italy, an increase in the system size exemption to 1MW would likely be sufficiently positive for near-term Italian demand to drive rapid draw-downs in downstream European inventories and stem the tide of near-term price declines.

• Sufficient restoration of market perception of near-term installation market strength in Germany to drive expectations of a high-single digit to low-double digit percentage mid-year FIT degression. Current widespread perceptions of a ‘soft’ installation market in German, we believe, are limiting concerns over the potential size and impact of this mid-year degression, mitigating the typical demand acceleration seen in recent years in Germany ahead of similar degressions. A change in this perception, driven either by incremental market data (data released by the Bundesnetzagentur this week showed surprisingly strong January registrations of ~266MW, an ~18% YoY increase over January 2010) and/or a near-term pick-up in 1H order books, will be required in order for concerns over a significant mid-year degression to drive near-term accelerated purchasing  activities.

Should neither of these events take place in the coming weeks, the potential emerges for continued inventory builds and a more sustained decline in module prices (as well as prices further up the supply chain) towards marginal cost levels for a greater share of global production. In such a circumstance, prices could stay at these depressed levels until the prospect of FIT degressions at the end of 2011 restart volume pull through, something that may not take place until well into 3Q11. Under these circumstances, Chinese Tier 1 c-Si module prices could fall to as low as $1.2-$1.3/W by the end of 2Q11, and not recover until the mid-to-late 3Q11 timeframe.

For more information on our commentaries, please contact us at info@photonconsulting.com or (+1) 617.262.5701.

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