"Recent checks across the solar supply chain indicate further confirmation of preliminary signs of a pick-up in demand," Shah wrote. "Utilization rates are increasing and poly prices could likely increase further in Feb. Demand pickup in multiple markets appears to be the primary driver of recent strength in fundamentals. Tier 1 companies in China, Taiwan and Korea are seeing increasing bookings momentum and as such are currently running at ~100% utilization. Downstream companies in Europe are also seeing rising orders and as such are likely looking to accelerate module deliveries by paying for air freight."
3. Demand improvement occurs because pricing is elastic in solar. Demand goes down and so does pricing, which in turn leads to renewed demand. But too much demand and prices can go up too much and kill the momentum.
Prices fell so far and so fast in solar that supply/demand elasticity had to kick in, spurring solar installations in markets where subsidies support project economics. That's occurring, but pricing has stabilized, as opposed to hit a level where companies would again be making money hand over fist.
There seems to be a backward-looking sense that solar is about to get rich again with another "fourth quarter 2010." That was when pessimism ran high about solar but Italy came out of nowhere to install so much that the industry had its most profitable quarter in recent history.
Yet what's occurring right now is improving demand as prices stabilize a little bit higher, and that does not suggest runaway profitability and gross margins back in the 30%-range for Chinese solar companies.
If pricing were to continue straight up and to the left, that might choke off some demand. And keep in mind that while polysilicon, wafer and cell prices have improved, module prices haven't.
4. Another perverse implication of the solar rally is that if solar stocks continue to rally, these companies may head back to the capital markets to raise more capital -- and they need it - and that will once again dilute shareholders.
Finally, it all comes down to the technical trade in a sector that has more often than not been the domain of fast money traders.
5. Traders often say it's not worth trading the last 20% downside of a short in solar, and the same can be said of a rally.
There are two types of trading in solar -- long-term bets and short-term bets, or put another way, technical bets and fundamental bets. The latest rally probably features all of these cross-currents.
For a long investor, there may be 20% left to go in this solar rally, but unless you are buying and holding for the 2013-and-beyond time horizon, getting in now based on improved short-term demand seems like a risky decision.
Solar companies can come out this earnings season and say shipments will improve quarter over quarter, without saying that margins will be any better. This type of commentary could keep solar stocks moving up from here, but it won't mean that trading momentum is sustainable once the reality of capacity growing as fast if not faster than demand sets back in.
That means for investors lucky enough to buy at rock bottom prices in early 2012, keep your finger near the trigger if you are not willing to hold solar stocks for at least 12 to 18 months and absorb what might be more pain.
After all, it could be a while before the dust settles and a secular demand upswing in an embryonic sector translates into normalized earnings and sustainable margins for long-term solar stock winners.
-- Written by Eric Rosenbaum from New York.
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