Deutsche Bank expects solar gold rush in 2014


Deutsche Bank Markets Research has raised its solar demand forecast for 2014 and 2015 to 46 GW and 56 GW, respectively.

In a new report published this week, 2014 Outlook: Let the Second Gold Rush Begin, Deutsche Bank said "upside demand surprises" from the U.S., Japanese and Chinese markets could continue in 2014.

"We expect streamlined incentive programs in China, additional subsidy cut signals in end 2014, and decreasing financing constraints to act as catalysts for upside. Similar to the '05-07 capacity rush, we expect another gold rush by downstream installers to add recurring MW ahead of policy changes over the next 2-3 years. Moreover, we expect grid and financing constraints to improve from 2014.”

Supply situation to remain tight

Deutsche Bank said it expected global project finance focus to remain skewed towards downstream as opposed to upstream, which could limit capacity expansion and drive some supply tightness. It also expects "some tightness" in the poly and wafer segments and sees prices rising by 10 to 20% from current levels.

The report said cash costs of some of the tier 1 poly suppliers were "in the high teens to low 20s, at or below the current price levels and prices need to rise above $25/kg levels in order to drive some of the tier 2/3 poly suppliers to turn on their mothballed production capacities."

In addition, Deutsche Bank expects availability of working capital financing from Chinese banks "to remain relatively challenging," which in turn means supply tightness could persist through the early to mid-2015 timeframe until new greenfield/brownfield projects come on line.

"The initial response of a lot of Chinese module suppliers has been to expand module capacity which has a low capital cost. However, due to a sharp increase in module capacity relative to cell/wafer capacity growth, we expect some tightness to emerge in the wafer/cell segments as well."

Improving business models, increasing investor participation and decreasing financing constraints could drive multiple expansion.

Solar stocks have historically traded at a significant discount to the market due to concerns about low entry barriers, low margin manufacturing businesses and high reliance on government subsidies, according to the report. Deutsche Bank sees evidence of more sustainable, diverse demand drivers along with emergence of new business models with high entry barriers could result in increased investor participation and valuation multiple expansion.

"Solar shares outperformed the broader equity markets in 2013 primarily due to short covering and increased participation from short term trading oriented investors, in our view. We expect 2014 performance of these stocks to be largely driven by long only investor participation."

As financing constraints for the sector start to ease in 2014, the bank said it expects demand upside in several new and existing markets to drive consensus estimate revisions and multiple expansion.

According to the report, key catalysts and swing factors include:

  • Q1 seasonality: solar stocks are generally discounting weak Q1 seasonality as demand from Europe, the U.S. and China has been historically very weak. However, demand in China is expected to remain relatively strong and also markets such as Japan, the U.K. and other international markets are likely to drive strong Q1 momentum
  • China and Japan demand outlook: Both China and Japan could represent 45-50% of 2013 demand — demand from both markets is expected to remain a major swing factor.

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