Time for the 2012 Oversupply Debate?
The Piper Jaffray analyst concluded, "Wafer and Poly pricing remaining strong this late in 1Q points to a strong start to Q2 for our upstream players, while weakening module pricing leaves us cautious on the downstream. We believe the upstream will continue to benefit this year from tight capacity, buoying prices, while downstream players will face pricing pressure as more capacity comes online and potential additional modules making their way onto European and U.S. markets."
Ultimately, it can seem as simple as three key trading triggers for solar stocks right now:
Long-term, sentiment driven trading in the wake of the Japanese nuclear crisis
A trade on the Italian policy change, and whether it results in a relief rally or negative surprise
First quarter weakness as a result of the Italian market slowdown leading to a short-term negative trade on weak earnings
Of course, once Italy does announce its policy changes, the debate will move to potential oversupply in 2012. Auriga Securities analyst Mark Bachman was already visiting that issue on Wednesday.
The Auriga analyst wrote on Wednesday, "At the risk of starting a larger food fight, we provide our view on how industry capacity develops and show that actual shipments end up materially lower than stated capacity, and that installations are another step lower than shipments. This does not counter our view of continuing module price declines -- lower prices are required to open newer markets and soak up supply -- but we think a better understanding of shipments vs. capacity highlights an overcooked argument. We continue to focus on names that benefit from higher polysilicon prices and whose supply chain is minimally exposed to spot poly prices."
This analysis leads the Auriga analyst to some picks that reflect the upstream and spot market strength thesis of Piper Jaffray, including polysilicon producer
Daqo New Energy
and wafer maker
(SOL - Get Report)
, but does not lead the Auriga analyst to lessen buy conviction for Chinese module companies that could face the downstream pressure, including Trina, Yingli and
In any event, the debate about 2012 oversupply when 2011 is still a moving target is just one more reminder that the long-term and short-term trading triggers in solar are constantly in flux. Said one solar analyst on Wednesday, between Italy, the German elections, the Japanese nuclear crisis, the anonymous report from China on Wednesday about a double of solar installations, the German solar company reports and potential first quarter weakness, the long-term versus the near-term divide in solar is stark, and "always a tough one to trade."
The Credit Suisse commentary also reflects the divide between short-term cautiousness and long-term support for solar stocks. "We are constructive on the secular prospects for solar long term. We will get more constructive at some point but now is TOO EARLY," wrote analyst Satya Kumar on Monday.
Credit Suisse breaks down its triggers for more bullishness on solar to such possible factors as:
The need to see much lower panel prices (ideally $1.20-$1.30/watt levels), making the market less reliant on subsidies, and attracting more investors
Working through the demand trough in Germany/Italy and reflecting lower subsidy rates
Capacity additions stopping
Poly prices dropping at least 40-50%
A more cautious tone from management
The need to see stocks stop going down on significant negative pre-announcements (which CS says has not happened significantly yet)
Channel inventory clearing out (right now inventories are growing, CS thinks, with as much as 500 megawatts of capacity that had been slated for Italy left with no immediate reallocation markets)
-- Written by Eric Rosenbaum from New York.
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