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The solar sector can bank on good profits
July, 2006: The PV industry is raking in fantastic profits at the moment – especially those companies at the beginning of the value chain, according to Michael Rogol‘s new study »Solar Annual 2006 – The Gun has Gone Off.«
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© Norbert Michalke / photon-pictures.com
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As expensive as silver: Solar-grade silicon is currently being traded on the spot market for up to $400 per kg.
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The rule of thumb: the closer the company is to the raw material, the higher the margin. The ones caught between a rock and a hard place are really the module manufacturers – they have to deal with ever increasing cell prices but can‘t afford to pass these prices on to their customers anymore.
Solar-grade silicon is being traded on the spot market for an average of $150 per kg, and in some cases as much as $400 – that‘s as much as silver. The current average price from the manufacturer is $55 per kg – with a trend towards increase. Next year the authors of the study »Solar Annual 2006 – The Gun Has Gone Off,« which will be published by PHOTON Consulting in July, expect prices of around $60 per kg. That means prices have doubled within three years. The production costs, however, are likely to have remained about the same.
And why? Three quarters of the silicon for the solar industry is produced using the classic Siemens process – a rather technically exhausted process. Investors who wish to build a silicon factory with Siemens reactors in western Europe could achieve production costs of between €27 and €32 ($35 and $41) per kg – at least according to Peter Fath, head of the business consulting agency SolMic GmbH, based in Burghausen, Germany and specializing in wafer and silicon manufacture. When using Fluidized Bed Reactors, the costs are around €25 to €30 ($32 to $39) per kg, calculates Fath, a man involved in consulting on the construction of such factories. Those systems that are already written off and used worldwide in the chemical industries active in the silicon business are likely to display costs far below that.
As a result, according to PHOTON Consulting‘s research on the silicon business in 2006, profit margins before taxes of 53 percent have been realized. In 2004, this figure was only 19 percent, then last year the figure was 42 percent. Topping all of these, next year the companies are expecting 57-percent profit margins. »The huge margins are being earned right at the top by those who produce silicon,« says SolarWorld boss Frank Asbeck, who now is also looking to enter the silicon business on a large scale together with the Degussa Corporation.
The wafer and cell manufacturers are also doing well, according to Solar Annual 2006. That‘s because these companies are the ones that can pass on the most of the high silicon prices. The average profit margins before taxes in the wafer sector rose from 5 percent in 2004 to 36 percent this year. Cell manufacturers saw average margin increases from 10 percent in 2004 to 21 percent this year. Michael Rogol, managing director of PHOTON Consulting and author of the »Solar Annual 2006« study expects an increase in the margins by 2010: up to 44 percent for the wafer sector and 29 percent for cells. The profit margins will be secured via falling costs and further increases in prices. Thalheim, Germany-based cell manufacturer Q-Cells AG recently informed its customers that they would be raising prices by 20 euro cents (26¢) per W as of July 1. That is an increase of just under 10 percent.
There isn‘t really a lot of room to increase prices now, however, and the module manufacturers are noticeably more resistant. Q-Cells customer Aleo Solar AG is preparing itself to simply produce less if this policy of inflated prices continues, says board member Jakobus Smit. He says that this is simply safer than guaranteeing suppliers that one will purchase large quantities over a long period of time at extortionate prices.
Module manufacturers in a squeeze
However, this isn‘t likely to affect Q-Cells‘ pricing policy. »In Asia, module manufacturers not working at full capacity will pay almost any price for the cells just to get its PV business up and running,« comments Lars Podlowski, CTO at Berlin-based Solon AG, which is also Q-Cells‘ customer. Therefore Solon, Aleo, and all the other module manufacturers that don‘t have their own sufficient cell production facility are in quite a predicament. If they don‘t buy any cells at today‘s inflated prices, then the production lines stay off-line; if they buy cells, then they can‘t raise the cost of their modules proportionately. »The prices have already plateaued – one module manufacturer just retracted a price increase announcement,« reports Andreas Hänel, CEO of Phönix Sonnenstrom AG.
Meanwhile, Solon is trying to implement prices of €4 ($5.14) per W for installers but they are bailing out. Therefore Solavent GmbH is no longer offering Solon modules: »Nobody wants to have them now,« says managing director Christian Fuchs, who promotes cheap prices on his website. He says €3.80 ($4.89) per W is just too expensive.
It‘s no wonder that profit margins before tax in the module production sector are far below the rest in the value chain. According to Solar Annual 2006, this year module manufacturers worldwide will have an average margin of 5.4 percent. As opposed to the upstream companies, the module manufacturers will even see a slight decrease in margins in 2007. By the end of the decade, however, the margin will be 8 percent – this won‘t be as a result of falling prices but rather has to be achieved by decreasing production costs. »The module price in Germany is with certainty at a point from which it has to fall next year,« believes Heiner Willers, Smit‘s colleague on Aleo‘s board of directors.
It‘s easy for those module manufacturers that have a piece of every part of the value-added chain – meaning they produce silicon, wafers, and cells themselves. A larger-sized German module manufacturer worked out the cost per watt for a solar module in this case: €2.30 ($2.96). Research conducted by PHOTON Consulting yielded a figure in the same ballpark: Rogol estimates around $2.50 per W this year. If the market grows as it has up to now then he calculates a cost reduction of between 7 and 10 percent per year until 2010. Even by 2008, costs (not the prices) for a turnkey PV system could be around $4,000 per kW.
As the prices will not fall at the same tempo, there are excellent chances for profit margins to expand over the next few years. »Solar Annual 2006« outlines a margin of 30 percent for the total value-added chain this year – which is much higher than in 2005 (22 percent) and 2004 (15 percent). The authors of the study also estimate a further increase in the next few years of up to 38 percent in 2010. Most of the money will be eaten up by the wafer and cell manufacturers – they will each get $1.6 billion this year alone. The silicon producers have a higher margin but smaller turnover and shall secure a pre-tax profit of $720 million. The module manufacturers are at the bottom of the barrel with an operating profit of $550 million with their small margins but relatively high turnovers. And the good news: by 2010, profits will not only remain at this level but they will have gotten substantially better, according to the PHOTON Consulting study. Therefore, the solar sector is likely to have a total of $27.2 billion in pre-tax profit in 2010.
This kind of positive outlook for the sector doesn‘t automatically mean that every company operating in the field will turn this kind of profit. And of course there is no guarantee that everything will definitely turn out as positively as the study forecasts. There are two presumptions that are fundamentally important for a high turnover and profit: that the market growth worldwide over the next few years is between 56 and 32 percent, and that the worldwide demand supersedes supply – at least until 2008.
Quicker than expected
The German solar industry – spurred on by the German Renewable Energy Law (EEG) – has spurted onward and upward over the last few years and has far outgrown the forecasts of many studies – including the predecessors of the Solar Annual 2006. The calculations made in Sun Screen I and II, which Rogol and his team wrote for brokerage firm Credit Lyonnais Securities Asia (CLSA), have proven themselves to be much too low (see PI 9/2004, p. 52 and PI 8/2005, p. 46), despite being the highest of any consultant or analyst. The estimate for the amount of solar modules to be produced in 2005 was given as 1.4 GW in the 2004 study (Sun Screen I) – one year later the study bet on 1.5 GW. The total actually turned out to be 1.8 GW (see PI 3/2006, p. 100). The expected turnover for 2005 was $10 billion according to Sun Screen I. The current survey showed $12.4 billion.
However, it is the companies‘ profits that have exceeded analysts‘ expectations the most. The 2004 study forecasted a profit before taxes of $1.2 billion for 2005. That figure jumped to $2.7 billion. The prognoses from Rogol‘s group – known rather as optimists in the industry – were far exceeded and the actual figures were in fact more than double the forecast.
The prognoses have now been altered considerably to reflect much higher figures in »Solar Annual 2006.« For 2010 Rogol expects production of 10.4 GW with a turnover of $72 billion and a profit before taxes of $27 billion. Therefore, within two years the analysts have increased their forecast for production by 217 percent, for turnover by 442 percent, and for profit before taxes by 724 percent.
10.4 GW of solar modules in 2010 – that is by far the highest prognosis that has been outlined in any study on the PV market throughout the world, but it has a solid foundation. The amount of cells and modules that will be produced over the next few years will almost solely depend on the amount of silicon available. The authors of »Solar Annual 2006« are calculating based on the assumption of 85,000 tons of high-purity silicon in 2010, of which 59,000 tons should be available to the solar industry. Using 7 g of silicon per W in solar cell power, this adds up to a total volume of 8.4 GW. It‘s true that the industry needs 11 g per W at the moment, but this value has been reduced quite considerably over the past few years and with silicon a scarce commodity, the industry has placed high priority on reducing the amount of material needed.
The difference left over between this figure of 8.4 GW and the 10.4 GW forecast is accounted for by thin-film technology – and that amount is difficult to estimate. There are simply too many plans regarding production expansion. If one were to count the projects that more than 50 companies active in this area have planned, this figure would add up to around 4 GW. Rogol‘s assumption of 2 GW of production for 2010 means that around half of the projects will have been put into action by that time. As thin-film manufacturers don‘t have any problems with raw materials supply, this estimate could possibly be too low. On the other hand, thin-film history has shown us that nearly all expansion plans up to now have taken longer to implement than planned.
10.4 GW means an annual growth of 44 percent and is equal to six times the amount of what was produced last year. And it‘s still four times more than production estimates for 2006. Who should install all of that? And where? In order to answer these questions, the authors of the study took a look at the 10 most important markets worldwide. The result: demand growth will exceed production expansion until at least 2008, maybe even until 2010. One can say for certain that today the demand worldwide is much larger than the supply, even if current interest in PV systems has been decreasing slightly in the PV hotspot, Germany (see PI 6/2006, p. 18).
While it is relatively easy to calculate the production output by looking at the amount of silicon available, it is far more uncertain to project how demand will develop. The statement under most graphs in this section of »Solar Annual 2006« is therefore »rough estimate,« and this is something not to be taken lightly. While the outlook is very sunny, the study is certainly not a guarantee things will happen exactly that way. However, if the last two studies are an indication, it may turn even sunnier for the solar sector.
The study »Solar Annual 2006 – The Gun has Gone Off« is available from Solar Verlag‘s new unit PHOTON Consulting. To order the study, go to:
http://www.photon-consulting.com
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