Manufacturers of solar panels who have raised their production levels are now being confronted by a massive buildup of excess supply. Several major manufacturers have recently increased production to a point that it would boost global capacity substantially. They are now being forced to respond appropriately to the situation or face serious repercussions.
Oversupply Looms over Industry
Among the major suppliers of panels that have raised production levels are the likes of Canadian Solar Inc. CSIQ Trina Solar Ltd. TSL and JinkoSolar Holding Co., Ltd. JKS. These companies as well as other panel producers are competing to set up even larger state-of-the-art facilities that can provide panels at a faster pace as well as at a cheaper price.
However, demand is expected to drop almost as soon as they begin to emerge from production lines. This is particularly true for China where subsidies for such products were removed in July. As a result, prices are plummeting and consequently, margins are expected to fall. This is not new for an industry which witnessed the fall of several major players around five years ago following a state of global oversupply.
Fallout of China’s Subsidy Cut
In China, the government has cut subsidies for solar farms which commenced operations after Jun 30. The smaller quantum of subsidy could lead falling shipments and reductions in production levels. For instance, Yingli Green Energy Holding Co. Ltd. YGE has said that it expects shipments to decline by 54% in the third quarter as a result of these developments.
Of course, the situation is not as dire as it seems. Solar demand is increasing, but growth has been falling. According to New Energy Finance, global solar production facilities will have a capacity of 67 gigawatts by this year, a year-over-year increase of 27%. Capacity is expected to increase by 25% in 2017 and by 23% in 2018.
However, it is difficult to say whether supply has exceeded demand already. This is because data to support or dispute such an inference will not be reported by companies until the fourth quarter. However, plummeting panel prices indicate that this has indeed occurred.
How Will Producers Fight Oversupply?
Canadian Solar has already said it is changing its expansion plans. The panel maker will expand capacity by only 5.8 gigawatts, instead of the earlier target of 6.4 gigawatts. On its conference call in August, the company’s CEO mentioned plans to “play safe” this year and look toward improving margins instead.
At this point, it is difficult to predict how long such a situation of oversupply may last. According to some estimates, this could last over a period for as long as two years. It seems it all depends on how companies react to this phenomenon. If they engage in a race to raise capacity, consequences will follow. A watchful approach seems to be best suited to such a situation.
Confidential: Zacks' Best Investment Ideas
Would you like to see a hand-picked "all-star" selection of investment ideas from the man who heads up Zacks' trading and investing services? Steve Reitmeister knows when key trades are about to be triggered and which of our experts has the hottest hand. Click for his selected trades right now >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
TRINA SOLAR LTD (TSL): Free Stock Analysis Report
JINKOSOLAR HLDG (JKS): Free Stock Analysis Report
YINGLI GREEN EN (YGE): Free Stock Analysis Report
CANADIAN SOLAR (CSIQ): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research