TEMPE, Ariz. (
was among the biggest losers in the solar sector on Wednesday morning, as an official proposal from Germany's environment minister to slash solar feed-in tariffs was finally reported.
In recent days, as rumors of a big cut to solar tariffs in Germany hit the market, it has been the Chinese solar firms that have suffered the brunt of share price declines.
Some of the biggest Chinese solar stocks, most notably
, were still showing larger losses than First Solar on Wednesday morning. First Solar, though, down more than 4%, was much closer to the Chinese solar losses than it had been in the previous few days of the solar selloff. First Solar shares had reached their average daily trading volume by midday Wednesday.
The German environment minister's proposal to slash solar tariffs on farmland projects at a 25% rate, a move not previously reported among the rumors, could be one of the reasons for the negative reaction on First Solar's business in Germany. Of course, a big caveat is that the news today out of Germany is the environment minister's proposal, and it is still a long way to parliamentary approval.
Still, if the proposal turns out to reflect the final parliamentary move, it can't be understated that First Solar had approximately 60% of its sales in Germany last year, so its sheer exposure to Germany is significant. This level of exposure had not sent First Solar down to a greater extent last week when Germany's expected cuts were first rumored.
The German finance minister's proposal also indicated that rooftop systems -- where First Solar has much less exposure because it does not operate in the residential market in Germany -- will be hit first, with reductions going into effect in April. That could be a minor positive for First Solar, since the ground-based solar, in which it has a commanding presence, will not face tariff reductions until July.
However, with reductions at 15% for open-field, and the surprising 25% level for solar projects on farmlands --
the most unexpected of the proposals made today by the environment minister -- investors may be seeing trouble ahead for First Solar.
It may be impossible to quantify the exact market share of First Solar's open-field business that would fall under the 25% farmland feed-in tariff cut -- First Solar sells to developers and distributors in Germany as opposed to directly running many open-field projects -- therefore, the data is more difficult to break out.
But the message from Germany's environment minister is clear: don't use farmland for solar. "That's a big part of what First Solar has been doing," said one analyst who did not want to be quoted until the final form of the Germany solar tariff changes is revealed. "This will push First Solar further into the commercial rooftop market to remain competitive," the analyst argued.
Some analysts, though, believe First Solar had seen this trend away from open-field coming for some time already. Mehdi Hosseini, an analyst at FBR Capital Markets -- and who will remain a bear on First Solar shares until it hits a $100 price target -- said that First Solar has moved aggressively into the U.S. open-field market because it had already seen German political winds moving against open-field development. "First Solar is one of the few companies in solar that actually has and acts on insight years ahead of time," Hosseini said.
This doesn't mean First Solar is not going to suffer to as great an extent as other solar companies in the wake of Germany's move. What's more, one disadvantage that First Solar has in the rooftop market is that its modules weigh more than the average solar module, and that limits the extent to which they can be implemented on older buildings.
Still, FBR's Hosseini believe the real issue is that Germany's move will put additional pressure on First Solar's pricing to remain competitive in the German commercial rooftop market. First Solar already had to offer price rebates globally last year to fight off the growing Chinese solar presence, led by
Yingli Green Energy
First Solar's Wednesday drop was much more than Yingli's decline of 1.5%, and just a little worse than Suntech's 3.7% drop. Trina, which saw its share price run up the most, even among the Chinese solar peers, was still down the most among the vertically integrated solar players, with a Wednesday mid-day loss of 4.5%.
"First Solar will not be shut out of Germany; they will find a way to remain competitive, and it will have to be lower prices," the FBR Capital Markets analyst said.
Because of its lower efficiency, First Solar's thin-film solar technology has to be priced 20 cents lower per watt than the crystalline silicon dominated by the Chinese solar players. At the end of December, FBR estimates that the average sales price among the Chinese players will be $1.90 to $2 because of bullish projections about demand in the first half of the year.
Now, with those bullish projections looking off base, if Germany pushes ahead with the tariff reductions, the average sale price will be driven down to $1.50 by the middle of 2010. The FBR analyst estimates that his previous average sale price estimate for First Solar of $1.47 in 2010 would have to be further reduced into the range of $1.30. "That price pressure is going to kick in," Hosseini said.
"Commercial rooftop is where First Solar is going to have to fight tooth-and-nail with the Chinese and German solar companies," a second solar analyst said, who did not want to be quoted until the German political theater reached a conclusion.
Commercial rooftop could, in fact, be the only real German market for First Solar in the long run. The analyst explained that margins on open-field business may come down so much, especially the farmland projects, that the developers of the projects won't be able to make money if First Solar does not reduce prices by a hefty margin. "If First Solar doesn't reduce prices, then it comes down to developers increasing profit by reducing hourly wages," the analyst speculated.
While some analysts who cover the solar companies may be hedging their bets until the German parliament acts, it looked like solar companies were wasting no time on Wednesday trying to figure out which relationships in Germany to focus on to keep market share up.
"I'm calling Germany every minute this morning and no one is picking up the phone because they are all scrambling, the same guys I talk to on a daily basis, and nobody's home," the analyst said.
-- Reported by Eric Rosenbaum in New York.
>>Germany Announces Proposed Solar Cuts
>>For Solar, April May be the Cruelest Month
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