Some of the biggest names in the solar business are having a tough year in 2018 as a number of factors pressure the whole industry. At a high level, demand is down, supply is up, and everyone is fighting for sales by lowering solar panel prices -- and that means finances are getting worse.
Solar stocks have been on a downward march for most of the year. First Solar (FSLR -0.94%), SunPower Corporation (SPWR 1.38%), JinkoSolar (JKS 1.04%), and Canadian Solar (CSIQ 0.67%) are all down double digits, and there are no clear signs of a turnaround in sight.
The law of supply and demand
The year 2017 was surprisingly good for solar manufacturers due to a surge in demand in China and the U.S., which faced the threat of tariffs in early 2018. Prices surged and manufacturers like First Solar took advantage by booking years' worth of sales. Commodity suppliers like JinkoSolar and Canadian Solar also saw strong margins and rising profitability because of solid industry trends.
But 2018 has been very different. Import tariffs hit the U.S. early in the year, and there was a decline in demand after the rush to build projects late in 2017. Early this summer, China surprised the solar world by reducing its own solar subsidies, which will lead to a decline of as much as 40% for the world's biggest solar market. The U.S. and China were two of the biggest solar markets in the world in 2017 with 64.6% of all installations, according to the website SolarPower Europe. So these two markets declining are naturally going to hurt solar panel manufacturers.
Analysis from Goldman Sacks estimates that global solar installations will decline 24% from 2017 to 2018, and solar panel prices will fall 15% to 30%. And that has hurt the stocks of the biggest solar panel manufacturers.
Adapting to change
Solar companies have tried to adapt by lowering operating costs and by differentiating themselves with improved manufacturing technology. First Solar upgraded its manufacturing with a product called Series 6, and Canadian Solar and JinkoSolar are expanding mono-PERC cell capacity.
SunPower has shut down its aging manufacturing lines to focus on high-efficiency production like its X-Series and a next-generation solar cell technology that will increase efficiency and lower costs.
Everyone is adapting to the competition in their own way, but everyone is suffering from the same macro dynamics facing the industry.
Will solar stocks recover?
The challenge for solar panel manufacturers right now is that there's no end in sight to the pressures facing the industry. Existing supply is going to continue to be available. And unless demand increases, we'll see margins continue to fall.
In the U.S., an unfavorable political environment nationally will continue for at least another two and a half years, and there's little indication solar installations will rise meaningfully over that time. China's solar incentive structure could change, but it's a wild card in the global environment. Countries like India and Japan have high hopes for solar, but won't be able to replace the lost U.S. and Chinese demand in the foreseeable future.
Until demand returns, solar stocks are going to be stuck in a rut. Profitability has long been hard to come by, and when demand isn't rising, there's not much to be bullish about in the solar industry.