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.