Deflation, Solar Style

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Less than a month after SunPower's (Nasdaq: SPWRA  ) surprisingly sunny report, the outlook for solar has since clouded over a bit.

In the current deflationary dance, the price of just about everything (aside from U.S. Treasuries) is getting pummeled. Solar panels are no exception. On its third-quarter conference call, JA Solar (Nasdaq: JASO  ) confirmed that average sales prices for its current quarter have dropped more than 20%.

Given that the low-cost cell crafter is whittling down higher-cost inventories, the fourth quarter will not be pretty. Gross margin guidance is in the range of 5% to 7%, which translates to roughly break-even non-GAAP earnings.

A few things need to happen for JA Solar's business to stay on track in 2009 and beyond. Unlike Yingli Green Energy (NYSE: YGE  ) and Trina Solar (NYSE: TSL  ) , which have followed a path of vertical integration, JA just does cells. So for one, the company needs its module-making customers, including Canadian Solar (Nasdaq: CSIQ  ) , to stay in business. That means making price concessions, which we've already discussed.

In order to maintain reasonable margins, then, JA needs to pay less for its own inputs, namely polysilicon wafers. This is where the company's relationship with the JingLong Group -- a leading monocrystalline polysilicon producer -- will come in very handy. Another of JA's wafer suppliers is ReneSola (NYSE: SOL  ) , which should give us more info on the broader wafer-price pullback when it reports next week.

Trumping these price adjustments is, of course, ongoing strong demand for solar products globally. The solar market "panic" that JA identified on its earnings call has led the firm to temporarily idle fully 40% of its production lines. That's a pretty scary statistic, and I would encourage Foolish investors to take a cautious stance here. If economies like Portugal, Italy, and Greece prove to be complete basket cases, I have a hard time seeing the bullish demand scenario for 2009 playing out exactly as described by the sunny solar forecasts.

JA Solar sports a middle-of-the-road three-star rating in Motley Fool CAPS. Enlighten us with your own Foolish views on the stock right here.

Fool contributor Toby Shute, known in CAPS-land as TMFSmashy, doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (7)

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  • Report this Comment On November 14, 2008, at 5:03 PM, Bootluver wrote:

    Its time the FOOLS hung up their website and comments. They are longer needed. We all know the market it no longer based on facts and figures, earning and projections, its all shifted by lies of manipulation and BS. Get in while its low, sell out when its high and don't stay longer than 15 minutes. Stock will never be a place to invest for more than 24 hours ever again so if you can't stay at your computer all day long and move your money in and out, get the heck out and stay out. FOOLS we don't need anymore of your financial BS anymore, we all can read the day charts , its a waste of time to make even more stupid stories to try and fit them. The super rich have ruined the stock market, may it rest in peace. Time for Socialism in the US.

  • Report this Comment On November 15, 2008, at 10:25 AM, HectorLemans wrote:

    Somebody woke up on the wrong side of the bed

  • Report this Comment On November 15, 2008, at 11:38 AM, toolzfoolz wrote:

    I agree, Hector! I think it's time we all became "Fools" and that is why I am suddenly back on the site. We need to steamline the portfolios, invest even smarter, and above all, not panic! We will survive this, but not like we have been surviving the past decade or's going to be tough, but the more "foolish" we become, the better for us and our economy. Fool on, and hats off to The Fool for keeping us informed, and keeping us honest!

  • Report this Comment On November 16, 2008, at 10:10 AM, markwg1 wrote:

    Why we are here it's because housing prices were plunged (dropped on avg 35% in US) since summer 2007.

    If you read more news about home sales, in many parts of the US, house sales were already picking up since Oct 2008 (up 120% in San Jose area in Oct 2008 Vs Oct 2007), up 65% in San Francisco, up 45% in Valley, etc.


    Once the home prices recovers (assume that we are now very close at the bottom of housing market), then economy activities (e.g. constructions, etc.) will be picking up again.

    I think Obama should build more public housing (like China) to make housing more affordable to their citizens! so the Americans will have more $$ to spend... instead of wasting their $$ just to pay their cars, mortgages, etc.

    Well, Obama did say something like the creation of green energy industries will create 5 million jobs in the US!


  • Report this Comment On November 17, 2008, at 3:57 AM, DBGMVETTE wrote:

    I sense consolidation coming because of the financial crises and that includes solar. The strong will survive, and some will consolidate and get stronger. Some of the weak will perish.

    There will probably be a slow down in solar if the world economy stays the way it is for most of 2009. JA solar had some big problems with their loss to Lemans etc. but many of the solar companies are in better shape.

    FYI I received this email from SOL Inverstor Relations in response to and email i sent them. We will know Tues. what the 3rd quarter brings and maybe a better idea of the outlook for the rest of the year.

    "Thank you for your email and for your interest in ReneSola.

    Raw material purchasing is not an issue for ReneSola. The company has good cash flows, a strong cash position (over $270 million as of June 30, 2008) and a solid balance sheet. In addition, ReneSola recently announced it has secured additional credit lines from two of China's largest banks. The company now has credit lines of approximately RMB2.8 billion in aggregate.

    ReneSola produce's solar wafers from a wide range of silicon raw materials, including reclaimable raw materials such as broken wafers and broken cells that are less expensive than other reclaimable silicon raw materials. The company also began producing its own polysilicon through a joint venture in Henan province and is building a polysilicon manufacturing facility in Sichuan province. "



    Derek Mitchell

    Director, Investor Relations

    Ogilvy Financial, Beijing

  • Report this Comment On November 18, 2008, at 8:23 PM, mcbowler78 wrote:

    Whoa... people calm down. Don't give up on the free market! Since 1913 the market has not been free. What we need is a stable currency. Only then will people be able to make sound investments and have real savings. Realize that the banking system we have was imported from Europe. If the U.S. is not free then freedom will not exist anywhere. Follow the constitution. Restore stable currency, stop the inflationary corrupt Federal Reserve / World Bank system. If you want socialism, go somewhere else!

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