Taking the Shine Out of Solar

Pressure keeps mounting for the solar industry. On one side, falling subsidies in Europe have driven panel prices lower all year, and on the other side costs are becoming harder to cut after the easy trims had been made.

For years, rapidly falling silicon prices drove manufacturing costs down. Solar power went from a dream to a renewable energy reality as low-cost labor in China put together less expensive materials into panels. But now that costs have stalled out and even risen for some companies, the question becomes why and how do we fix it?

Silver has become a big drag on cost as the shiny metal climbs in price. Companies like DuPont (NYSE: DD  ) make silver paste, which is used as a front side contact material on panels, a necessity for most panels. With silver's price nearly doubling this year, manufacturers such as Canadian Solar (Nasdaq: CSIQ  ) , JA Solar (Nasdaq: JASO  ) , and Suntech Power (NYSE: STP  ) are feeling the pain. And it doesn't look like there's any reprieve soon.

Solar panel makers use 11% of the world's supply of silver, and as production capacity grows so will demand. That means the $0.11 or so of silver in each panel may continue to rise. Trina Solar (NYSE: TSL  ) has seen this as non-silicon costs have fluctuated in the same $0.73 to $0.74 per watt range over the last year instead of falling as you might expect. Alternatives are needed quickly for manufacturers to keep cutting costs, but it won't be easy.

DuPont for one is working on alternatives to current silver use, but a transition may take awhile. Silver is such a big part of solar manufacturing that this problem won't be solved overnight. In the mean time, First Solar (Nasdaq: FSLR  ) has seen its costs gradually fall, and silver doesn't pose a problem for the thin-film maker.

Foolish bottom line
As earnings season approaches, keep an eye on cost-per-watt trends and margins at solar manufacturers. Right now they're being hit from all sides, but the strong companies that survive should be big winners in the long run. It's just a question of how much pain they'll feel in the mean time.

Got your eye on one of these solar stocks? Add it to My Watchlist, and we'll keep you up to date with our Foolish analysis.

Fool contributor Travis Hoium owns shares of First Solar. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Motley Fool newsletter services have recommended buying shares of First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On June 28, 2011, at 10:31 AM, curt00 wrote:

    Wall Street firms have been bashing and downgrading Chinese solar stocks for 1-2 years.

    Every few months, they come up with something different, such as European subsidy cuts, over-capacity, falling prices, rising costs, etc., etc. They use spin to spread FUD (Fear, Uncertainty and Doubt). They keep you focused on the trees, instead of the forest.

    Yet, during this time, the forest for Chinese solar companies has soared. Their revenue and profit have grown faster than for Netflix, LinkedIn, Salesforce.com, Apple, eBay, Priceline, etc., etc.

    Revenue growth from 2009 to 2010:

    JA Solar (JASO): 211%

    Netflix: 30%

    Salesforce.com: 21%

    Apple: 52%

    Amazon: 40%

    Revenue growth from 2007 to 2010 (approx.):

    JASO: 337%

    Netflix: 79%

    Salesforce: 121% (Fiscal YE is on end of Jan)

    Apple: 165%

    Amazon: 131%

    Net Income growth from 2007 to 2010 (approx.):

    JASO: 338%

    Netflix: 141%

    Salesforce: 251%

    Apple: 301%

    Amazon: 142%

    JASO expects 2011 shipments to be 50% higher with 90% of 2011's shipments under contract. How many other companies can say this? JASO’s P/E was ~3, and Wall Street still spreads FUD (Fear Uncertainty and Doubt) and downgrades JASO.

    Imagine this:

    A company’s revenue is dropping by 50% per year, losing money and gives you guidance that their revenue and losses will get worse in the next year and this is guaranteed because 90% of their customers have already committed by law that they won’t buy anymore. Then a Wall Street firm gives the company a “strong buy”.

    This is the kind of rating that Wall Street gives.

    Go to Seeking Alpha and search for "wall street half reports on solar" to get the full story.


  • Report this Comment On June 28, 2011, at 5:01 PM, dogmatica wrote:

    Aloha Travis!

    I agree that silver costs will weigh upon JASO's earnings, but I have reservations about how much affect it will have. Mark Bachman was the first analyst I know of that first brought up this subject, warning in April that silver costs would "overwhelm" JASO's earnings. Well, that did NOT happen;in fact, as we now know, JASO once again beat the bears' estimates. We'll soon find out if you're correct or not.


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